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Low U.S. Deficit Could Temper Interest Rates

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May 12, 2014 by   Leave a Comment

The combination of rising tax revenue and, to a lesser extent, constraints on federal spending are pushing the national deficit down. And soon it could even reach prerecession levels.

The Congressional Budget Office projects the deficit to drop to $514 billion in the fiscal year that ends in September. The Wall Street firm Deutsche Bank is even more optimistic, estimating the deficit could dwindle to $465 billion, according to its latest forecast.

That’s a huge drop from the $1 trillion-plus annual deficits that prevailed from 2009 to 2012. The last time the deficit was that low was in 2007, when it totaled $342 billion.

In fiscal 2013, the deficit sank to $680 billion. About 80% of the reduction was tied to faster economic growth that generated a larger tax windfall for the government, Deutsche Bank estimates. Lower federal spending accounts for the rest of the decline.

A shrinking deficit means the U.S. Treasury won’t have to sell as much debt, Deutsche Bank senior economist Carl Riccadonna points out. And that lessens the need for the Treasury to raise interest rates to attract buyers.

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