It has hardly been mentioned in the current U.S. federal budget debate, but economist William V. Sullivan Jr. of Dean Witter Reynolds Inc. thinks the estimated $27 billion rise in interest expenses in the fiscal year just ended deserves more attention. In the three prior fiscal years, falling interest rates held down interest outlays despite a $1 trillion rise in the gross federal debt. But the party ended in early 1994 when the Federal Reserve decided to reverse course and push up interest rates, thus raising the Treasury's debt servicing costs.
Sullivan concedes that the Fed's shift back toward monetary ease in July of this year suggests that fiscal 1996 will see a smaller increase in interest outlays. But he can't help worrying about the dangers on the upside.
"If market rates were to rise just 150 basis points to levels prevailing in the early 1990s," he warns, "the cost of servicing the growing national debt could rise by $50 billion in short order."