This is an interesting take on the probability of any rate hikes. If this is a relevant perspective, I think the argument could be made that there won't be any rate hikes for a very, very, very long time... what do you think?
...in spite of potential government shutdown, threat of public backlash, our government could barely get its act together to cut $38 billion. Yet with $14.3 trillion of debt outstanding, an increase of 0.25% would add $36 billion to our deficit! Mr. Bernanke, who claimed on 60 minutes, that he can squash inflation within 15 minutes has relatively few policy tools to do that. Pretty much only raising rates or stopping QE2. Raising rates is the simplest, but if a 0.25% rate increase (minimum the Fed has ever done) adds $36 billion to the deficit, will he, or anyone else have the stomach to deal with the consequences?
Just think how hard it was for the government to reach an agreement on $38 billion. That agreement was only reached to avoid the imminent shutdown that both parties decided they would face negative consequences from the voters for.
...as our debt has grown out of control, it's a real issue now. You can argue that with a steep curve maybe you wouldn't get a 0.25% cost increase across the board if the fed raised short term rates. You can argue that at least a trillion is held by the Fed so it's a wash (but then why does it count in the debt limit in the first place). On the other hand, you could argue that we should have the same rate as the ECB since allegedly our economy is in better shape than Europe. That would be a 1% increase. If you believe that QE2 has held down borrowing costs out the curve, than merely stopping that could add to our cost.
So, at a time where the government has demonstrated a complete lack of will over $38 billion, we are left in the hands of Ben to determine short term rates, influence the curve, and Timmy to determine what maturity profile that 'best meets our needs'. The actions of either of these two unelected individuals could dwarf the $38 billion as every 1% of increased borrowing costs would cost $143 billion. Since the government could barely deal with $38 billion, how will they deal with increased borrowing costs? Does even congress know just how trivial their cuts look relative to the potential increases in debt cost?