Budget Deficits Could Put Upward Pressure on Interest Rates

Budget Deficits Could Put Upward Pressure on Interest Rates

The U.S. economy is showing signs of improvement in the opening weeks of 2026, but rising federal budget deficits could push interest rates higher and create longer-term challenges for businesses and consumers, according to a new report from The Conference Board.

The research group cited updated projections from the Congressional Budget Office indicating that the federal budget deficit will reach $1.9 trillion in 2026 — equivalent to 5.8% of gross domestic product. By 2036, the deficit is projected to widen to $3.1 trillion, or 6.7% of GDP. Much of the increase is tied to rising spending on Social Security, healthcare, and other programs associated with an aging population.

“These deficits are much higher than the historical average of 3.8% of GDP over the past 50 years,” Conference Board analysts wrote in a Tuesday report. The group warned that rising net interest payments on the national debt could crowd out private investment, forcing businesses to contend with higher borrowing costs.

As federal borrowing increases, the government’s need to finance its debt may place upward pressure on interest rates across the broader economy, raising financing costs for companies and consumers alike.

Despite fiscal concerns, some economic indicators remain stable. While consumer sentiment has recently softened, Conference Board data show that U.S. job growth improved in January. The organization’s Employment Trends Index rose to 105.06 from 104.51 in December. Readings above 100 signal labor market expansion.

“Unemployment and layoffs continue to remain mild, suggesting that the labor market is in balance despite a low 2025 hiring rate,” Conference Board economist Mitchell Barnes said in a statement Tuesday.