The Federal Reserve’s decision to cut its benchmark interest rate by a substantial half-point this week will have a notable impact on the 30-year annuitized jackpots for Powerball and Mega Millions. Federal Reserve Chair Jerome Powell announced the rate cut on September 18, 2024, from Washington, D.C., marking the first such cut in more than four years. This action is expected to lower borrowing rates for consumers, a move aimed at stimulating the economy. However, for Powerball and Mega Millions, the cut presents a less favorable outcome.
The increase in interest rates over recent years, spurred by the Federal Reserve’s efforts to combat inflation following the COVID-19 pandemic, has benefited these major lottery games by allowing their advertised jackpots to grow more quickly. The U.S. Treasury sets bond rates in response to these interest rates, and lotteries use these rates to calculate the annuity factor—a key component in determining jackpot sizes. According to Powerball officials, the annuity factor is directly influenced by interest rates for securities purchased to fund prize payments. Higher interest rates result in higher advertised grand prizes, which in turn drive higher game sales as more players are enticed by the soaring jackpots.
Powerball and Mega Millions jackpots are advertised based on the amount the winner would receive over 30 years, before a federal tax of 37%. While many winners opt for a one-time cash payout, those who choose the full value of the pre-tax jackpot receive an immediate distribution followed by annual payments over 29 years. The lottery invests the cash payout in bonds backed by the U.S. Treasury. Currently, the rate for a 30-year Treasury Bond stands at 4.25%.
This week’s cut by the Federal Reserve reduced the government’s interest rate from 5.3% to 4.8%, which is expected to lower the 30-year Treasury bond rate in the upcoming months. If the economy continues to stabilize, further rate cuts are anticipated in the coming quarters. Chair Powell remarked that recalibrating interest rate policy is logical given recent progress on inflation, which hit a three-year low of 2.5% in August, down from a peak of 9.1% in mid-2022.
The decrease in interest rates could slow the growth of advertised jackpots from one drawing to the next. However, winning the Mega Millions jackpot might become slightly easier next year. The Mega Millions Consortium is rumored to announce significant changes, including the elimination of the Megaplier and Just the Jackpot options and a reduction in the number of gold Mega Balls from 25 to 24. This change, set to be implemented with the April 8, 2025, drawing, would slightly improve the odds of winning from the current one in 302.5 million.
