The Federal Reserve said Tuesday it expects a record $14 trillion of debt in the next three years, the biggest increase since the recession ended in 2009.
The Fed has been reluctant to raise interest rates for a decade and is currently debating whether to start the process of winding down the Fed’s $85 trillion-a-year bond-buying program.
The economy has contracted for seven straight quarters.
But there are signs that the recovery could be starting to pick up.
“The Fed has now decided to start raising rates,” said Adam Levitt, chief U.S. economist at Wells Fargo Securities.
“They need to raise rates to encourage economic growth.”
The Fed said Tuesday that it has cut rates for two straight months, in a move that will keep rates at a near-record low, even though many of the jobs created last year were temporary.
But it also said that rates will remain low for the next six months.
The Federal Reserve cut rates to an almost two-year low of 0.25 percent in December, the first time it has done so since March 2009.
This time, the Fed is also considering keeping its benchmark interest rate near zero for another year, a move economists expect to be resisted by some business groups and by the private sector.
In addition to the record $1.1 trillion in debt, the economy is still expected to have about $10 trillion of unfunded liabilities, including pension liabilities and student loans.
“There’s a lot of money that is out there that isn’t going to be paid off in the short run,” said Robert Hall, an economist at the nonpartisan Congressional Budget Office.
“The long-run outlook is a bit rosier.”
Some economists worry that a large share of the $10.4 trillion in federal debt will never be paid down, and they have begun raising the prospect of a default.
Even if the debt is paid off, it would leave a $2 trillion shortfall in the economy and an additional $1 trillion to $2.4 billion in potential interest expense.
If the Fed starts raising rates soon, it could leave some Americans with less money in the bank and force some employers to reduce their hours, reducing hiring.
Meanwhile, the Federal Reserve will have to spend much of its budget on the Fed, which is expected to cut about $1,200 per household per month in cash payments to consumers.
There’s also some uncertainty about whether the Fed will continue to buy Treasury bonds and mortgage-backed securities to keep the economy afloat.
It could be a year or two before the Fed begins winding down its $85 billion-a year bond-building program, and the Treasury would need to pay back a portion of the loans.