Who Receives the Interest? Reserve Status, Holder Composition and the Fiscal Channel of Monetary Policy

When a central bank raises rates, the government's interest bill rises. Whether the extra interest supports domestic demand depends on who receives it. Recent evidence finds this direct fiscal channel of monetary policy was small in the United States before 2020, because long Treasury maturities slowed the pass-through of policy rates to interest costs. We argue that this conclusion does not carry over to the post-2022 tightening. Quantitative easing replaced long-term Treasury debt with overnight interest-bearing reserves, so the consolidated public sector repriced far faster than Treasury maturities suggest, and the price-insensitive official holders that once anchored demand for Treasuries were replaced at the margin by domestic private buyers. Using published Treasury, Federal Reserve and TIC data, we decompose the rise in public-sector interest outflows between 2021 and 2024. Net interest rose by about \$530 billion, three quarters of it due to higher rates rather than more debt. Counting the Treasury and the Federal Reserve together, roughly 57 percent of the increase in public-sector interest outflows reached domestic non-federal holders directly, 27 percent reached them through the Federal Reserve's payments on reserves and reverse repos, whose counterpart was the end of its remittances to the Treasury, and 16 percent went abroad. For the Treasury securities the Federal Reserve held at the end of 2021, quantitative easing made higher rates reach non-federal holders' income roughly two to two and a half times as fast as if the bonds had stayed in private hands. Domestic investors absorbed close to 90 percent of the growth in privately held debt. We discuss what this implies for the potency of rate hikes, for the design of interest on reserves, and for reserve-currency issuers more generally.