You Can Thank the Fed for Boosting the Powerball Jackpot

The Federal Reserve is boosting the Powerball jackpot without even buying a ticket.

Since there was no winner in Wednesday night’s drawing, the Powerball prize rose to $1.5 billion, the third-largest lottery jackpot in U.S. history. It is a substantially bigger prize than a year ago, before the Fed began raising interest rates this year to tame inflation. That is because the advertised jackpot is the future value of the prize after being invested in government bonds over 30 years.

Higher interest rates mean bigger lottery jackpots. Larger prizes tend to entice more people to buy tickets, said J. Bret Toyne, executive director of the Multi-State Lottery Association, which runs Powerball.

“While some businesses might suffer from rising interest rates, for lottery games that have annuity for the prizes, it is more of a tailwind,” he said.

Here is how it works: 34% of Powerball ticket sales fund the big jackpot, said Mr. Toyne, with another 16% going to the lower-tier prizes. (The other 50% goes to various state programs, operating costs, and retailer commissions.) If a winner chooses a lump sum payout, the person gets that 34%. If instead the person takes the jackpot in annual payments over 30 years, the prize money is invested in a portfolio of bonds.

The Federal Reserve on Wednesday lifted interest rates by another 0.75 percentage point in Chairman Jerome Powell’s quest to tamp down inflation. The central bank’s benchmark federal-funds rate now sits in a range between 3.75% and 4%.

For the next drawing Saturday, the cash set to be available in the jackpot is more than $745 million, according to Powerball. That would be the lump-sum prize. But lottery officials advertised the total jackpot as $1.5 billion, the estimated value of the bond investments.

No winner has chosen the annuity since 2014, according to lottery records.

Economists say it is better for winners to take the lump sum so they can invest it with the intention of earning a better return on the cash. The potential downside of choosing the lump sum over annual payments is the greater risk of losing the money.

“The advertised jackpot is kind of a deception,” said Victor Matheson, an economics professor at College of the Holy Cross.

Still, the allure of a 10-figure jackpot has drawn in more bettors.

Economists who have researched lotteries say that once jackpots reach around $500 million, non-regular lottery players are more likely to jump into the game. That figure is also the value that tends to draw increased media attention.

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The lottery is of course, a racket. But it can be amusing. For a couple bucks you can daydream about what you would do with an unimaginable amount of money. That said, the annuity is an advertising gimmick. The true value of the lottery is always the current cash value (before taxes).