Fed rate rises and government spending seen at loggerheads

People continue under strains as energy drives a spike in costs

While the US Federal Reserve has persistently attempted to tame inflation this year, the government continues to spend heavily as it runs record-high budget deficits.

The November US budget deficit jumped by $57 billion or 30 percent from a year earlier to $249 billion, a record for the month, as revenues fell and outlays for education, healthcare and interest on public debt rose sharply, the US Treasury reported on Dec 12.

Receipts for November fell 10 percent, or $29 billion, from a year earlier to $252 billion, while outlays rose 6 percent or $28 billion to $501 billion, also a record for November.

"The present inflation has been caused by the huge increase in federal government spending, which was accommodated by the Fed," said Raymond Hill, a senior lecturer in finance at the Goizueta Business School at Emory University in Atlanta.

"As is almost always the case, government spending is the fundamental culprit here, with the Fed abetting (driving the getaway car)."

Driving the revenue decline was a 4 percent drop in individual withheld tax receipts, a 64 percent increase in individual tax refunds, and a 98 percent decline in Federal Reserve earnings, the Treasury said.

"The big deficit was primarily due to a significant drop in government receipts even as the Biden administration continued to spend at a torrid pace," Michael Maharrey wrote on Dec 13 on schiffgold.com, which focuses on investments in precious metals.

"The US government can't keep borrowing and spending without the Fed monetizing the debt. It needs the central bank to buy Treasuries to prop up demand. Without the Fed's intervention in the bond market, prices will tank, driving interest rates on US debt even higher.

"Either the government will have to cut spending or the Fed will have to keep creating money out of thin air in order to monetize the debt."

For the first two months of fiscal 2023, which started on Oct 1, the Treasury's interest payments were up $48 billion, or 87 percent, the department said.