The U.S. government is now paying more than $1 trillion per year in interest alone on debt it has already incurred, which amounts to about $2.8 billion per day. Total national debt stands at more than $38 trillion, and the debt-to-GDP ratio exceeds 120%, reaching a level last seen in 1945 after World War II. In fiscal year 2025, interest costs totaled $1.22 trillion according to the U.S. Treasury and figures from the Congressional Budget Office, exceeding the defense budget; the Peter G. Peterson Foundation expects that without a change in course, interest payments will rise from about $1 trillion in 2026 to $2.1 trillion by 2036—$16.2 trillion in interest over ten years. In the first five months of fiscal year 2026 alone, $425 billion in interest had already been paid, 7.2% more than in the same period a year earlier.
Kevin Warsh, seen as the incoming Fed chair and nominated by President Trump in January 2026, therefore faces the task of cutting short-term rates without reigniting inflation while also keeping the government’s long-term borrowing costs low enough to avoid a debt spiral. Possible exits from the situation are a budget surplus achieved through spending cuts and tax increases, a default, “growing out” of the problem through strong economic growth, or inflating away the debt while keeping interest rates lower. A surplus is considered politically difficult given large spending blocks such as Social Security, Medicare, defense, and debt service; a default is portrayed as unrealistic because of the dollar’s role as the world’s reserve currency and U.S. Treasuries’ central position in the global financial system. For 2024, it is also noted that debt rose by 6.5% while nominal GDP grew by 5.2%, meaning debt increased faster than economic output.
The focus is therefore on an approach that reduces the real value of debt over time through negative real interest rates: if inflation runs at about 4% and refinancing costs are 3%, the real rate is minus 1%, causing the real debt burden to shrink year after year. As a historical precedent, the period from 1942 to 1951 is cited, when the Federal Reserve used yield curve control to keep short-term rates near zero and cap long-term Treasury yields at 2.5%, while inflation in some postwar years ranged between 5% and 20%; over the following three decades, the debt ratio reportedly fell from around 120% to about 30%. Warsh is said to have outlined a “new accord” form of coordination between the Fed and the Treasury in a July 2025 CNBC interview, involving a shift in the Fed’s balance sheet—about $2.3 trillion in mortgage-backed securities and long-term bonds—toward short-term Treasury bills and a relaxation of the Supplementary Leverage Ratio, which limits banks’ holdings of Treasuries; the SLR had been temporarily suspended in March 2020 during the pandemic.