When the Federal Reserve Bank raises interest rates, where does the extra money go?

Question

The higher interest rate will result in millions more dollars being paid into government coffers. Which account gets it, and who can use that extra money (Congress? the Administration? Nobody?)

Answer 1

I worked as an economist at the Fed for 11 years, and I can tell you that all of these answers are mostly wrong.

I think it is easier to think of how the Fed injects money in the first place. The Fed prints some money. It uses that currency to buy Treasury securities. The money is now in circulation, and people (hopefully) have faith in the value of the currency.

As the Fed injects more money into the economy by buying Treasury securities, interest rates will fall.

Now, suppose the Fed wants to pull money out of the economy. It does so by selling some of its Treasury securities. This brings in money. The money is now useless, since it is not in circulation. This money is NOT used by the Fed, until it wants to inject it back into the economy. It is NOT available for Congress, which can only get revenue from taxes!

Answer 2

Actually the Fed deliberately keeps wages down for the 99%. Whenever inflation drops below a certain level, they raise interest rates up a bit. This causes economic growth to slow down right before businesses have to start competing for workers. Thus, there is never a shortage of workers, and their pay never goes up. The fed has openly admitted to deliberately manipulating the economy against the 99% in this way. For example, a former fed officer once said "If the economy continues to grow over 4% and the labor market continues to tighten, you might see another rate rise in February". This is just one example of how the fed openly admits that it deliberately keeps wages down. In the last 30 years the 1% have seen a 275% rise in income, while the middle class has not even kept up with inflation, and the poor have gotten poorer. The fed deliberately manipulates the economy to make their cronies on Wall Street richer while the 99% get poorer. It's time to end the Fed.

Answer 3

The money people pay in interest gos tho the lenders not the government.
In principle when the fed raises interest rates they are decreasing the money supply by selling government bonds in the open market taking money out of the system. The fed continuously buys bonds with newly created money, expanding the money supply to accommodate economic growth, so probably raising rates just means they will buy less. The bond purchased from the public has the effect of retiring the government debt.

Answer 4

Wrong.
The higher interest rate will result in dollars being paid into government coffers.

Dynamic analysis shows that higher rate slow investments and growrth, therefore reduce revenue feedback.

Some people still use a static analysis for revenue estimations which even the JCT (Joint Committee on Taxation) has determined to be flawed and short sighted. Those who want to raise taxes are hoping that the general public has no concept of dynamic revenue estimating. What is the difference? Static scoring ignores human nature and revenue feedback. A simplified example is like saying we sold 1000 cars at $10,000 last year and made $10,000,000, if we raise the price to $20,000, we will make $20,000,000. Dynamic analysis stops to ask the question, how many will buy a $10,000 car at $20,000?
SEE: How to Measure the Revenue Impact of Changes in Tax Rates
by Daniel J. Mitchell, Ph.D. http://www.heritage.org/Research/Taxes/BG1090.cfm
Backgrounder #1090 August 9, 1996
How Faulty Official Figures Greatly Overstate the Cost of the Bush Tax Plan
by William W. Beach, Daniel J. Mitchell, and D. Mark Wilson
Backgrounder #1416 March 6, 2001 http://www.heritage.org/Research/Taxes/BG1416.cfm

Answer 5

The Fed raises rates by selling government bonds and locking the cash away. So the answer is anyone who loans anyone else money. The government doesn't get any of it, in fact, raising rates costs it money since it is the world's largest borrower. By selling bonds already held in the Fed's account for cash, they are reducing the available money in the economy. Because money is scarce, its price goes up. The price of money is the interest rate. If you have a 401(k) then any money contributed after the rate hike in bonds gets a proportion of the extra money.

Answer 6

The Fed sells government bills/bonds to take the excess liquidity off the market. Theoretically, the money is deposited at the Fed, which means it is instantly spent by the US Government.

Answer 7

The money comes out of the economy. Here is a good explaination:

http://www.a2dvoices.com/realityCheck/markets

Answer 8

they cut rates.

some people are worried that this will lead to inflation in the long run, because rate cuts mean more money is pumped into the system over a period of time.

Answer 9

to pay off bonds- make more loans. etc.