WASHINGTON (AP) — Growing concerns over lending to President Donald Trump’s administration are driving up interest rates, impacting affordability, economic growth, and posing a political risk for Republicans in the upcoming midterm elections.
The rise in energy costs due to the conflict with Iran has influenced bond prices that support U.S. government financing. The interest rate on a 10-year U.S. Treasury note has exceeded 4.44%, up from 3.95% before the conflict began in late February. Mortgage rates are at their highest in nine months, and auto sales are declining.
This economic challenge is worldwide, as interest rates are increasing in various countries amid fears of inflation, questions about government debt sustainability, and investment surges in artificial intelligence. President Trump has attempted to reassure Americans with a plan to reduce the $1.8 trillion annual budget deficit. He has cited revenue from tariffs, foreign payments for his “Gold Card” visa, spending cuts by the Department of Government Efficiency, and accelerated economic growth. He suggested last week that Vice President JD Vance’s fraud task force could unlock significant savings.
“If he does well, we’ll have a balanced budget without having to change anything,” Trump said.
However, economists remain skeptical about these plans achieving their intended results.
Jessica Riedl, a budget and tax expert at the Brookings Institution, has noted that servicing the national debt has tripled since 2021, now exceeding $1 trillion annually.
“President Trump signed a tax cut bill projected to add $5 trillion to the 10-year deficit. Tariffs offset a minor portion of these costs,” she stated. “Budget deficits could surpass $4 trillion annually within a decade under current policies.”
The deficits are expected to rise as Social Security and Medicare expenses continue to exceed tax revenues. The U.S. Treasury rate climbed as high as 4.67% in May but eased as negotiations over the Iran ceasefire advanced. Rates similarly surged in 2025 due to Trump’s “Liberation Day” tariffs, eventually lowering when the tariffs were moderated.
Kent Smetters, a faculty director at the Penn Wharton Budget Model, analyzed the rise in 30-year Treasury yields, attributing 60% to expected continued borrowing and 40% to Iran war inflation and Trump’s tariffs.
Glenn Hubbard, former White House Council of Economic Advisers chairman, voiced concerns about the U.S.’s reduced capacity to combat major economic crises like the 2008 crash or the coronavirus pandemic.
“I don’t think we have the space we had in 2008 or 2020,” Hubbard, now a professor at Columbia University’s Business School, said. “Washington lacks ideas — good or bad — to solve the issue.”
Interest Rates Spark Political Debate
Amid voter concerns about high costs for essentials, interest rate hikes are becoming a Democratic talking point in the battle for control of the House and Senate.
In Colorado’s fifth congressional district, Democrat Jessica Killin emphasizes that ongoing deficits and interest hikes complicate home buying, car purchases, and credit card debt management.
“Things are already expensive,” said Killin, an Army veteran. “We can talk about gas, but borrowing costs make it worse.”
Joe Reagan, another Army veteran seeking a Democratic nomination, focuses on fiscal stewardship in his campaign.
“Every dollar spent on interest is not invested in infrastructure, education, veterans’ services, or growth,” Reagan emphasized.
They challenge Republican Rep. Jeff Crank in a district the Democrats wish to gain. Killin pointed out the deficit showcases that Trump “says one thing and does the opposite.” In March 2025, Trump pledged to balance the federal budget soon.
Crank did not respond to requests for comment.
Fraud Reduction as a Deficit Tactic
The administration argues for steady deficit reduction. Despite lower deficits last year compared to 2024, tariffs partly fueled the decline, though they face potential refunds due to Supreme Court rulings.
Treasury Secretary Scott Bessent recently referenced a report claiming up to $500 billion of annual government fraud could be eliminated, which “would reduce the deficit substantially.”
Bessent seemed to reference a 2024 Government Accountability Office report estimating $233 billion to $521 billion of annual fraudulent spending. However, these estimates partly stem from the pandemic-induced borrowing era.
The White House and Treasury declined to specify Bessent’s sources.
On deficits, Bessent contended the administration inherited severe deficits.
“We inherited the worst budget deficit in history — not during a recession or war,” Bessent said.
Bessent previously aimed to cut the annual deficit to 3% of the U.S. GDP, a rate currently doubled.
Though investors continue buying U.S. company shares, boosting the stock market, rising interest rates hint at the national debt’s vulnerability.
According to economists, financial markets might pressure political leaders to address systemic imbalances, potentially before voters do.
Hubbard highlighted that the whole bond market system is underpinned by trust in debt repayment. The word “credit” ties to a Latin term, also the root of “creed,” about a belief system.
“Debt is about trust: I believe you will pay me back,” Hubbard noted. “That works until it doesn’t.”