The Budgetary Implications of Higher Federal Reserve Board Interest Rates

This paper explores the potential impact of the Federal Reserve Board’s decision on interest rates on the budget deficit. The first part recounts the history of the 1990s surplus, correcting the widely held misunderstanding that this surplus was achieved by the Clinton administration’s tax increases and spending cuts. The second part examines the direct and indirect impact of Fed rate hikes on the federal budget deficit. The third part examines the impact of Fed rate hikes on state budgets.