The Federal Reserve's preferred inflation gauge held steady in July, a result that strengthens the case for further interest rate increases unless price pressures show clear signs of easing. The central bank had earlier signalled that it would raise rates unless it saw improvements in inflation, and the latest data does little to alter that stance.
The unchanged reading comes at a delicate moment for US monetary policy. With the federal debt having crossed $40 trillion for the first time this month, Wall Street economists are increasingly warning that the bond market, rather than Washington, will impose fiscal discipline. David Kelly, chief global strategist at J.P. Morgan Asset Management, and Apollo chief economist Torsten Slok have both argued in recent days that the fiscal trajectory, a Federal Reserve weighing a rate hike, and a surge of AI-related corporate bond issuance all point toward the same outcome: rates that stay higher for longer.
Slok closed his note by endorsing a line from billionaire investor Stanley Druckenmiller, who wrote in the Wall Street Journal that the long-term Treasury yield is «the only fiscal disciplinarian the U.S. has left.» Druckenmiller's essay was a direct attack on the Treasury Department's decision, announced on 19 August, to double long-dated bond buybacks from $2 billion to at least $4 billion per operation, shortly after the 30-year Treasury yield hit a 19-year high. «The market's verdict was swift and correct,» Druckenmiller wrote. «This wasn't liquidity management, it was price management.» His prescription was blunt: «If the 30-year must trade at 5.5% to clear, that isn't a crisis. It is an invoice.»
The essay carries particular weight because Druckenmiller was Treasury Secretary Scott Bessent's mentor at Soros Fund Management three decades ago. Together with George Soros, the two built the trade that broke the Bank of England's defence of the pound in 1992. Now Druckenmiller is applying the same playbook against his own protégé, reading the gap between what a government claims it can sustain and what markets will actually allow.
Kelly's analysis draws a distinction that matters more than the $40 trillion headline figure itself. That number represents total federal public debt outstanding, including roughly $7.8 trillion the government owes its own trust funds. The measure economists actually watch, debt held by the public, will end this fiscal year at $32.3 trillion, or 100.5% of GDP, according to J.P. Morgan projections. That ratio stood at just 34.7% as recently as fiscal 2000, when the federal government posted a $236 billion surplus.
Kelly traced the reversal to four categories of fiscal decisions compounding since the last period of budget health in fiscal 1996–2000. Tax cuts in 2001, 2017, and 2025 pulled federal revenue down from an average of 19.1% of GDP to 16.7%, a cumulative $11.1 trillion hit. Wars in Iraq, Afghanistan, and Iran pushed defence spending from 3.5% to 4.4% of GDP, adding $3.9 trillion. Social Security, Medicare, and Medicaid spending climbed from 7.8% to 10.1% of GDP as the population aged, adding $12.5 trillion. Everything else, boosted by crisis-response spending during the 2008 financial crash and the pandemic, added another $5.2 trillion.
In short, over the last 25 years, America voted itself a series of tax cuts, waged expensive wars, got older, and then spent its way out of a couple of crises. Add it up, and the total of $32.7 trillion before interest costs «more than accounts for» the debt surge of the 21st century, Kelly wrote. He was explicit that the real drivers are not the culture-war talking points dominating political debate: entitlements, defence, and tax policy, full stop.
Slok's note points forward. Since 2006, gross federal debt has grown by $32 trillion while nominal GDP grew by just $19 trillion, with debt nearly quintupling while the economy grew less than 2.5 times over the same period. The Congressional Budget Office projects debt held by the public climbing from 100% toward 175% of GDP under current policy, while the Office of Management and Budget sees deficits near 5% of GDP in coming years, on top of a current run rate closer to 6%. Deficits of that size are normal in a recession, Slok notes, but these are forecasts for a fully employed economy.
Both economists agree that deficits of this magnitude no longer automatically trigger the inflation spiral that economic orthodoxy once predicted, which is precisely why Washington has felt no urgency to act. Kelly pointed to the bond market's own pricing as evidence: since January, 10-year Treasury yields have risen 0.51 percentage points.