Rates, Debt, and Deficits
Fourth Quarter 2025
“A national debt, if it is not excessive, will be to us a national blessing.” – Alexander Hamilton
As the third quarter of 2025 ended, the Federal Reserve (“The Fed”) cut rates for the first time in nine months, and the first time since President Trump was inaugurated. While only a 0.25% cut, it signaled the Fed believes inflationary effects from current and potential tariffs may not materialize to the extent recently feared, while employment may need support at some time in the future.
These rate cuts may benefit different sectors of the economy and markets in different ways. As we consider this, it is important to note that there is a chance that the unsustainable debt spiral the U.S finds itself in may lead to a significant reckoning at some point in the future—one the Fed may not be able to control.
Rate Cuts – How does this affect me?
The 0.25% interest rate cut declared by Chairman Jerome Powell had been anticipated since the summer, as inflation numbers ran cooler than many economists expected and employment data from the past 12 months was revised lower. Let’s consider their impact on several categories of investments.
Stocks: Except in times of emergency, rate cuts are typically fairly positive for stock prices. Companies can issue debt at lower rates, allowing them to borrow at a lower cost and potentially grow the company at a faster rate. Smaller and more indebted companies tend to benefit the most from this effect. Lower rates also draw money into stocks from the sidelines, as cash yields drop and investors seek ways to see their savings earn more.
Bonds: While immediate moves in bond prices are up (as a reminder, when yields go down, actual bond prices themselves go up), future returns in the bond market are typically reduced at all maturities when interest rates fall. Yields 2-5 years out were already at the lower point on the yield “curve,” as markets have expected further cuts and lower rates in the next several years.
Cash / Money Markets: Unfortunately, rate cuts ultimately mean lower cash yields for investors. The yield on money market funds that clients have enjoyed for the past several years has inched lower with each successive interest rate cut. This is the third cut since rates peaked in 2024 and may bring many funds under a 4% yield.
Rate Cuts – How does this affect Uncle Sam?
In short, rates cuts are a positive for the government, as new debt that is being issued requires lower coupon payments and thus lower interest payments. However, this effectively papers over the underlying issue – a massive national debt only eclipsed once in the nation’s history (when measured as a percentage of GDP) during World War II.
As the federal government issued new debt and rolled over old debt during COVID, interest payments on new Treasury bills and bonds were manageable because rates were historically low. After the rate increases from 2022-2023, the full weight of the national debt and debt issuance began to be felt, as interest payments increased rapidly.
At the end of September 2025, the debt stood at over $37 Trillion.
That number may not hold much meaning for most citizens in terms of their everyday lives. But where the rubber meets the road is the interest payments on that debt. Annual payments, which previously amounted to several hundred billion dollars, have ballooned to over one trillion (with a “T”). Debt service is expected to eclipse all other federal spending except Social Security in the next fiscal year.
For reference, in the 2024 fiscal year, the funds collected by the U.S. government through taxes, tariffs, etc. totaled $4.92 trillion, while it spent a total of $6.75 trillion. So we could soon see roughly 20 percent of our tax dollars going just to pay interest on the debt.
A bigger slice of every dollar of taxpayer money increasingly goes to interest payments on debt rather than constructive uses for the country. If Washington does not bring the budget back in line, and deficits continue to surge as they have for years, the result will be more borrowing, a higher debt, and ever-higher interest payments.
This vicious debt cycle has not yet led to dire consequences. However, along with many economists, we believe that eventually the international community may view the U.S. debt as a sub-optimal risk/reward ratio, and demand higher interest payments to compensate for a potentially declining dollar down the road. This would increase longer term interest rates which the Federal Reserve might struggle to control, and force Congress to finally reckon with the generations of overspending by finally balancing the budget.
Hope for the best
While parties in Washington have proven themselves increasingly unable to compromise, and neither party has shown the commitment to get anywhere near a balanced budget, as Americans we have to hope that as the risks of a spiraling debt become more dire and more immediate, cooler heads will be forced to prevail. How do investors protect themselves from this or other unknowns? We encourage clients to review their asset allocation with their portfolio manager at Mitchell Sinkler & Starr on a regular basis to ensure it continues to align with their specific goals.
– Mitchell Sinkler & Starr’s Portfolio Managers
Economic and Capital Markets Data
Quarterly Table – Are We at Tech Bubble Valuations?
As the S&P 500 Index has reached valuation levels that are eclipsed only by the technology bubble in the late 1990’s, comparisons have been made between the two periods. We find a simple review of forward price-to-earnings ratios of the largest U.S. listed companies (by market capitalization) is a reasonable way to compare the euphoric valuations of that period versus today.
From the table below we can see that several companies sported absolutely eye-popping valuations in 1999. Aside from Tesla, none of the top 10 holdings in the S&P 500 are trading at such extreme levels, perhaps providing a measure of assurance. However, the majority remain pricier than most of their historical norms and the broader market’s longer term average. Another item of note is the heavier concentration in the current index vs 1999. A sizeable contraction of a small number of tech names could have a more pronounced impact in the benchmark than it did 25 years ago.
