Quantitative Easing Revisited, page-3

Dazed

"So.... the Fed is paying interest to the participating banks on a balance of 2.5 trillion. Where does the Fed get the money to pay that interest?"

The Fed is paying about $6.7 billion a year in interest on reserve deposits to the commercial banks. The Fed is receiving about $126 billion a year (my estimate based on 3% return) in interest from the bonds purchased under QE. You may notice that the Fed is making a huge profit out of QE.

"Secondly, how would the Fed keep paying interest if/when the rates start to rise?"

The Fed sets the interest rate paid on reserve deposits. That rate will only go up when the Fed lets it go up. I estimate that the Fed has to raise the rate on reserve deposits from the current level of 0.25% to over 4.69% before they start losing money. In the most optimistic scenario, I don't see short US rates back at those levels in the next ten years.

The rest of your comments are based on the erroneous assumption that QE has a cost to the Fed, or you going off on a tangent about the US economy. Forgive me if I won't bother commenting on them.

Cheers