Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the Federal Reserve Funds the Government Without Congress
Transcript
- Lucas: So the government has a checking account. Just like you or me — a checking account at a bank. Except its bank is the Federal Reserve, and the balance can swing by half a trillion dollars in a matter of weeks. Luna: And that checking account — the Treasury General Account, the TGA — is one of the most overlooked forces in the bond market. It's also where fiscal policy meets monetary policy in a way most people never see. Lucas: Exactly. When Congress passes a spending bill, the Treasury writes checks — literally draws down its account at the Fed. When it collects taxes or sells debt, it deposits money back in. Simple mechanics. But the scale of those flows has real consequences for liquidity in the banking system. Luna: And for the Fed's interest-rate tools. The TGA is essentially a drain on reserves. When the Treasury holds a large balance at the Fed, that money is out of the banking system. It can push short-term rates up if it gets too large. Lucas: Right. So let's use a concrete case — the 2023 debt-ceiling standoff. In early 2023, the Treasury was constrained by the debt limit. It couldn't issue new debt, so it ran down the TGA to keep paying the government's bills. The TGA balance dropped from about $600 billion in January to below $50 billion by early June. Luna: That's $550 billion injected into the banking system over a few months. That's a huge liquidity injection — essentially quantitative easing by another name, just through the fiscal side. Lucas: And markets felt it. Short-term Treasury bill rates went haywire because the supply of bills shrank. The Treasury wasn't issuing, so investors scrambled for alternatives. The Secured Overnight Financing Rate — SOFR — gyrated. And when the debt ceiling was suspended in June 2023, the Treasury rebuilt the TGA by issuing over a trillion dollars in bills in just a few months. Luna: That drained liquidity just as quickly. And the Fed's reverse repo facility — the ON RRP — was the shock absorber. It peaked at over $2 trillion in mid-2023. Money market funds were parking cash there, and when the Treasury issued bills, that cash moved from the ON RRP to the TGA. Lucas: So the TGA and the ON RRP are linked. The ON RRP acts as a buffer. When the TGA is low, reserves are high — and money flows into the reverse repo. When the TGA rebuilds, reserves fall, and the ON RRP drains. It's a seesaw. Luna: Which brings us to May 2026. Where are we now? The debt ceiling was suspended again in early 2025, and the Treasury has been rebuilding the TGA. As of this month, the TGA balance is around $750 billion — up from $200 billion a year ago. Lucas: That $550 billion increase has pulled reserves out of the banking system. Meanwhile, the ON RRP balance has fallen from about $500 billion to under $100 billion. That buffer is nearly gone. So the next time the Treasury needs to issue a lot of debt — say, after another debt-ceiling fight — there's less cushion. Luna: And that could put upward pressure on short-term rates. The Fed might have to adjust interest on reserve balances — IORB — to keep the fed funds rate in its target range. Or we could see repo market stress like in September 2019. Lucas: September 2019 is the cautionary tale. Back then, the TGA had been built up to around $380 billion after the debt ceiling was suspended. Corporate tax payments drained reserves further. And one day, overnight repo rates spiked to 10 percent. The Fed had to step in with emergency repo operations. Luna: The mechanics are straightforward but the stakes are high. So understanding the TGA helps you understand why the Fed does what it does. It's not just about inflation and employment — it's also about managing the Treasury's cash flows. Lucas: If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. That's literally what funds these conversations — small contributions from listeners who find value in them. Luna: Yeah, it makes a real difference. Keeps us independent and focused on the mechanics, not the headlines. Lucas: So back to the TGA. The Treasury and Fed have a formal agreement called the Supplementary Financing Program — but that's only used during extraordinary stress, like in 2020. Normally, the Treasury just issues debt and lets the TGA fluctuate. Luna: And the Fed's role is to accommodate that. The Fed is the Treasury's fiscal agent. It processes payments, auctions securities, and manages the TGA. But it doesn't control the TGA balance — Congress and the Treasury do. Lucas: Which creates a tension. The Fed wants ample reserves to keep the banking system stable. But the Treasury might need to build a large TGA to have a cash cushion. Those two goals can conflict. Luna: Especially when the debt ceiling is a recurring drama. Every time it's suspended, the Treasury issues a ton of debt to refill the TGA. That drain on reserves can tighten financial conditions without the Fed raising rates. Lucas: So fiscal policy — via the TGA — can do some of the Fed's work for it. A rising TGA is like a de facto tightening. A falling TGA is like easing. The Fed has to account for that in its models. Luna: Chair Powell has acknowledged this. In press conferences, he's talked about the TGA as a factor in reserve estimates. The Fed publishes a weekly report on the TGA balance and the ON RRP. It's not obscure to them. Lucas: But it's obscure to most investors. And that's a gap. If you're trading short-term rates, you should watch the TGA like you watch the Fed funds rate. A $100 billion swing in the TGA can move the repo market. Luna: And the repo market touches everything — from mortgage rates to corporate borrowing costs. So a seemingly arcane government checking account has real economic effects. Lucas: Let's zoom out. The long-term trend is that the TGA has grown structurally. In the 2000s, it averaged around $50 billion. After 2008, it rose to $100-200 billion. In the 2020s, it's often above $500 billion. The government is keeping a bigger cash buffer. Luna: Part of that is because the Treasury has shifted to issuing more short-term debt — Treasury bills — which makes the TGA more volatile. Bills mature quickly, so the Treasury has to roll them over constantly, and the cash flows in and out. Lucas: And part of it is that Congress takes longer to raise the debt ceiling. The Treasury needs a bigger rainy-day fund to keep paying bills during standoffs. So we're in a world where the TGA is larger and more variable. Luna: Which means the Fed's balance sheet management has to adapt. The Fed has said it wants to hold reserves in the 'ample' range. But if the TGA swings by $400 billion, 'ample' is a moving target. Lucas: So here's the concrete takeaway: The next time you see headlines about the debt ceiling or the Treasury's cash balance, think about the liquidity impact. It's not just a political story — it's a plumbing story with market consequences. Luna: And for investors, watching the TGA and the ON RRP together is a simple way to gauge reserve scarcity. If the ON RRP is near zero and the TGA is rising, that's a yellow flag for money markets. Lucas: We've come a long way from 'the government's checking account.' But that's really what it is. And like your own checking account, if you don't pay attention to the balance, you can get a nasty surprise. Luna: Let's hope the Fed and Treasury keep coordinating. Because when they don't, we get September 2019. And nobody wants a repeat of that.