Interest payments are a component of the Federal Government fiscal statement. Since the Federal Government runs a deficit, it by identity adds money to private sector.
Here u go for reserve balances:
If the interest rate earned on our short maturity Treasury assets is very close to the interest we pay on reserves, then our interest earnings from the Treasury are simply passed through to the banks. In this sense, our balance sheet is just another way to transfer interest payments on Treasury securities from the Treasury to the banks.
https://www.federalreserve.gov/newsevents/speech/waller20250710a.htm
And for Treasury part:
Finally, a third channel works through interest income effects. Higher interest rates raise government interest payments, boosting income for private bondholders. If not offset by higher taxes or reduced transfers, this income transfer supports aggregate spending. Unlike the valuation channel, which reduces aggregate demand and reinforces disinflation, the interest income channel weakens both the output contraction and the disinflation from rate hikes, with larger debt stocks boosting these offsetting effects.
https://www.bis.org/publications/aer-2026/high-public-debt-shifting-financial-markets
All mainstream econ only. Here’s a bit heterodox one, ofc Brazil’s case is much more extreme than the U.S.
Brazil has had, since the middle 1990s, one of the highest real interest rates in the world, yet not one of the lowest inflation rates. By the end of that decade, an inflation targeting regime (ITR) was introduced. Real interest rates have remained extremely high for international standards, while macroeconomic performance has been dismal on the same grounds. This article argues that these results can be explained by, among others reasons, pressures from the rentiers to frame monetary policy in a way to sustain very high interest earnings in a context where inflation is not very sensitive to monetary policy instruments. Under the ITR, the interest rate seems to have been kept above what would be required to maintain low inflation under normal conditions (even if one assumes a demand-pull inflation, which is not necessarily the case), with a potentially negative impact on growth and employment. This is interpreted as an indicator of monetary policy ineffectiveness. On the empirical ground, this article compares interest rate, inflation, unemployment, and real output growth for Brazil with both ITR and non-ITR countries selected by judgment sampling.
https://redfame.com/journal/index.php/aef/article/view/3710
Hyperinflation is usually interpreted as a result of the monetary financing of serious fiscal imbalances. Here, a fiscalist alternative is explored, in which inflation explodes because of the fiscal effects of monetary policy. Higher interest rates cause the outside financial wealth of private agents to grow faster in nominal terms, which in fiscalist models calls for higher inflation. If the monetary authority responds to higher inflation with sufficiently higher nominal interest rates, a vicious circle is formed. The model is particularly advantageous for hyperinflations in which most of the fiscal action concentrates in the interest bill on public debt and debt rollover, rather than seigniorage or primary budget deficits. Brazil in the late 1970s and early 1980s serves as a motivating case.
https://faculty.wcas.northwestern.edu/lchrist/papers/Tight Loose.pdf
Of course the argument often made is that propensity to consume out of this interest income is low, but there is just so much money at the top 10% that the channel becomes an effective stimulus directly increasing consumption. Also, in case of developing countries, interest income has much higher propensity to be exchanged for foreign currencies in the foreign exchange market, especially debt held by foreigners (particularly important since these countries have currency pegs).
For example, let’s say you are the Iranian government, and the U.S. has just sanctioned your country. This leads to an immediate disruption in the flow of resources from the rest of the world into your country. What should your central bank do? The good answer is obvious: set rates at 0% or below 5% (even 5% is unnecessary). But if you do that, all the financial hoards become less valuable. Is that bad? Your country is under sanctions; you can’t create stuff from money, so the hoards should be less valuable. But certain people at your central bank want certain people to maintain most of their claims on real output, so they raise rates to double digits and claim it’s being done to control inflation. Now, those people’s hoards are doubling in nominal terms even as wages decrease. Money supply keeps increasing and inflation feeds rate hikes which feed inflation, in the most regressive way.
Now, with price-level changes at 70%, the risk-free rate on the Iranian rial is still 25%. You might say that’s a negative real return. But 25% still doubles their nominal claim in three years for no reason. Why do their hoards deserve more protection than workers’ wages? They are doing nothing; even if they labored in the past (most did not), they aren’t doing anything to deserve it right now amidst war and sanctions. They are getting free money without giving up liquidity.
Point is, if you want to make bonds useful you have to make it completely illiquid, non-negotiable (i.e. non-transferable), not have it be legally recognized as collateral and only pay cash very slowly or at the end (called zero coupon). Risk free rates provided by the Central Bank and most sovereign bonds are exact opposite, its money for nothing.
The yields are higher because markets expect Fed to keep rates high or hike the rates (because Fed thinks rate hikes fix supply shocks by magic and markets know how the Fed reacts), so the existing bonds reprice accordingly.
Very good reason to stop issuing long term bonds. Even now only 18% of total Treasuries are 10Y or above in duration.