How the Debt Ceiling Impacts Interest Rates

The Federal Reserve was able to agree to keeping interest rates steady during its July 14 meeting, helped by the fact that the debt ceiling crisis that gripped the nation just a few weeks before had passed.

One reason the Federal Reserve expects continued economic growth and low unemployment is that just weeks ago, lawmakers in Washington, D.C. avoided a default on the country’s debt, an unprecedented event that would have been a potential landmine for all aspects of the economy, even interest rates. 

The Federal Reserve kept interest rates at the current range of 5-5.25% Wednesday, its highest level since 2007. The Fed funds rate influences all kinds of financial instruments, including interest rates on savings accounts, money market accounts and other similar products low-risk assets are likely to remain high. 

Currently, the top annual percentage yield (APY) on high-yield savings accounts is 5.12%, nearly 13 times the Federal Deposit Insurance Corp.’s national average for savings accounts of 0.4%. 

How the Debt Ceiling Impacts Savings Account Interest Rates

While the impacts of a U.S. debt default has been widely analyzed, there has been little published on how it might impact interest rates on savings accounts at banks and credit unions.

Due to tightening conditions, interest rates on credit cards, mortgages, car loans and other consumer loans would almost certainly rise higher if the debt ceiling was breached. In the days leading up to the debt ceiling deadline this year, the premiums being charged for Treasury securities maturing in June shot up. 

“The increase in interest rates represents a cost to taxpayers and a lack of confidence among investors,” wrote Brookings Institute economist Wendy Edelberg and researcher Noadia Steinmetz-Silber.

But that doesn’t mean that interest rates on savings accounts or money market accounts will go higher too if the U.S. were to default on its debt. They’d likely move the other way, in fact.

If the government had passed the deadline without a deal, it would be unable to pay its bills. That would have likely pushed the U.S. into a recession driving down interest rates on CDs and high yield savings accounts as businesses, financial institutions and individuals weathered rough economic waters.

Another Debt Ceiling Deadline Coming in 2025

While the most recent iteration of the debt ceiling crisis has passed, that doesn’t mean it’s gone away. The agreement in early June set a new debt ceiling deadline: Jan. 1, 2025. And though it may be more than a year away, the timing could provide another tense standoff that could roil the economy.

The 2025 deadline comes after the next election cycle, which could involve a new president and a change in which political parties control the chambers of Congress. However, the new deadline is before the newly-elected politicians take office, potentially leaving it up to politicians who have lost their races or who are retiring to approve another raise in the debt ceiling.