Where the hell did all my money go? Oh, my debt ate it!

There is good news and bad news about the future of U.S. interest rates. The Fed Funds rate now sits at a 4.50% to 4.75% range. The CME FedWatch Tool shows a 96.9% chance that the Federal Reserve’s FOMC will cut the funds rate another 0.25% on December 18, 2024 for the last rate cut of 2025. That’s the good news.

The bad news is that interest rates were at one point earlier this year looking like the Fed Funds rate could get back down to or close to 3.00% in 2025. That, as of the current inflation and growth data, is now completely off the table. Using the live data available today the nearest levels on the FedWatch Tool are indicating an 80.6% chance that Fed Funds will be in a range of 3.50% to 4.25% — and the highest percentage odds at the present is the 3.75% to 4.00% range.

Several issues are coming up at once. With Donald Trump being re-elected as President, the new economy from 2025 to 2028 is expected to have higher economic growth but the trade tariffs may rekindle, even if it is a one-time bump, higher prices when prices have been unable to stay under the 2.5% inflation level.

Another issue is that the U.S. Treasury’s “Debt to the Penny” site now shows that the U.S. owes $36.13 trillion. With deficits now being the norm, that number is going to rise in 2025 as well as the 2025 budget has already been set. The debt servicing costs for the federal government already hit $1.1 trillion at the end of Q3-2024 and this is becoming a severe strain that will only make deficit spending worse for the total Debt to the Penny.

These were the following percentage odds shown by the CME FedWatch Tool for December 2025:

• For the range of 3.50-3.75%, the tool is showing a 21.4% chance, lower than the 28.1% chance a week ago and versus 23.1% a month ago.
• The 3.75%-4.00% range is now the highest probability by far at 32.7%. That chance was 27.5% a week ago and 31.4% a month ago.
• The 4.00%-4.25% range is now at 26.5%, up from 15.1% a week ago and versus 23.4% a month ago.

While those levels are all based on live-market data and can change, the reality is that rates may be nearly a percentage point higher than they were expected to be by the end of next year. The debt level’s net interest rates are slower to adjust, but the reality is that a normalized full one-percent higher on $36 trillion translates to more than $360 billion more in net interest (debt servicing) costs each year.

Having lower interest rates helps consumers and individuals alike. Using straight-line math, which can admittedly not show a true representation based on certain pay-off tables, will show what a 1% difference means to interest rates. This is just the additional cost:

• A 30-year mortgage (without using mortgage math and prepayments) on a $400,000 home translates to $120,000 more in interest payments over a 30-year life.
• A 6-year auto loan on a $50,000 car is $3,000 more in interest payments over a 6-year life.
• A $10,000 average credit card balance would cost an extra $100 per year as long as the debt is held and it’s worse if you include the compounding effect, but at steep rates it’s already bad enough.
• A $1 billion private equity buyout financed over 7 years will cost an additional $70 million in interest over that 7-year period.

The U.S. economy is still in a stronger position than many economists had been expecting earlier this year. The growth expectations and the expectations for the S&P 500 have also risen for 2025. Now we have to wait and see what impact the tariffs will have on wholesale and consumer inflation — and to see how much they can shave off of the government’s spending deficit.

Lower interest rates are going to be needed in the years ahead. At some point the Federal Reserve is going to have to rationalize its inherent conflict of interest. And that all assumes that the economies of the world and the savers inside the U.S. want to keep funding the U.S. deficits with an ever-growing debt burden.