Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Cares About the Treasury General Account
Transcript
- Lucas: So, there's a number the Fed watches that almost nobody outside of Wall Street has heard of, but it can swing the plumbing of the entire financial system. It's the Treasury General Account, the TGA. Luna: The Treasury's checking account at the Fed, right? I've seen it mentioned in Fed communications, but it always felt like background noise. Lucas: Exactly. And it's not background noise right now. In fact, there are reports the Treasury could tap a near one-trillion-dollar balance to fund bond buybacks. So the TGA is suddenly very front and center. Luna: A trillion dollars sitting in a checking account. I mean, that's a lot of zeroes. But why does the Fed care where the Treasury parks its cash? Lucas: Because when the Treasury spends down the TGA, those dollars end up in the banking system as reserves. When the Treasury builds up the TGA, it drains reserves. And reserves are the fuel for bank lending, for money market rates, for the federal funds rate. Luna: So it's a lever on liquidity. And that's why the Fed watches it so closely, even though it's technically the Treasury's account. Lucas: Right. The Fed doesn't control the TGA, but it feels the impact. A big swing in the TGA can either add or drain hundreds of billions of dollars of reserves, and that directly affects the Fed's ability to keep the federal funds rate where it wants it. Luna: And speaking of keeping things running, a quick note on this show. If you've been getting something out of these episodes, a couple of dollars a month is genuinely what keeps these going. You can buy me a coffee dot com slash fexingo, if that's something you've thought about. No pressure, just helps keep us ad-free. Lucas: Yeah, every bit helps, and we appreciate it. Now, back to the TGA. So, let's talk about how it actually works. The TGA is essentially the Treasury's cash balance at the Fed. It fluctuates daily as tax receipts come in and as the Treasury pays out for everything from Social Security to defense contracts. Luna: But the Treasury also has cash at private banks, in something called the Treasury Tax and Loan system, right? So why keep a big balance at the Fed at all? Lucas: Good question. The Treasury uses the TGA for precise control over its cash. It's like the operational checking account, while the TT&L accounts are more like a parking spot for excess cash. Since the 2015 debt ceiling episode, the Treasury has deliberately kept a larger buffer in the TGA to avoid running out of cash at a critical moment. Luna: And that buffer got really big during the pandemic, didn't it? I remember the Fed had to step in and do repos to keep money markets from freezing when the TGA was draining fast. Lucas: That's right. In 2020, the TGA was over a trillion dollars, and then the Treasury spent it down to fund stimulus, which flooded the system with reserves. That caused the repo market to seize up in September 2019, actually. Fast forward, and the Fed had to intervene again. Luna: So the TGA isn't just an accounting detail. It has real consequences for funding markets, and the Fed has to keep an eye on it to avoid another disruption. Lucas: Exactly. And right now, we're in a period where the Fed is shrinking its balance sheet — so-called quantitative tightening. That means reserves are declining, and the TGA becomes even more important because it can either add or subtract from that tightening pressure. Luna: And the effective fed funds rate is sitting at 3.63 percent, right at the middle of the target range. So if the TGA swings too much, it could push rates away from the Fed's target. Lucas: Precisely. The Fed wants to keep the effective rate within its target range, which is currently set by the interest on reserve balances rate of 3.65 percent. If the TGA drains reserves too much, the fed funds rate could start to drift higher. And that's why the Fed watches the TGA so closely. Luna: So the TGA is essentially a liquidity shock absorber. But I've also heard about the Treasury's plans to do buybacks. How does that tie in? Lucas: That's the big theme right now. Treasury Secretary Bessent is reportedly considering using the TGA to fund bond buybacks. The idea is to buy back older, less liquid Treasury securities and issue newer ones in their place, which could improve market functioning. But it also means the Treasury would be spending down the TGA, which would inject reserves into the system. Luna: And that would work against the Fed's quantitative tightening, at least in the short term. So there's a bit of a coordination question here. Lucas: Right. The Fed and Treasury have separate mandates, but their actions are intertwined. This is why you see headlines about Druckenmiller and others doubting the Treasury's bond ploys. They question whether buybacks will actually work as intended, or just add volatility to an already uncertain market. Luna: And speaking of market signals, the 10-year breakeven inflation rate just dropped to 2.32 percent from 2.34 percent. Does that matter for the Fed's view on the TGA? Lucas: It's more of a macro backdrop. Breakevens are a market-based measure of inflation expectations. A slight decline suggests investors are a bit less worried about inflation, which gives the Fed some room to be patient. But it also means real rates are a bit higher, which could affect the Treasury's cost of borrowing. Luna: So the TGA is connected to all of this. It's not just a plumbing issue; it's tied to fiscal policy, monetary policy, and market expectations. Lucas: Exactly. And that's why the Fed is so focused on it. Let's get into the mechanics a bit more. When the TGA is high, reserves are low. When the TGA is low, reserves are high. The Fed has to forecast these swings and adjust its operations accordingly. Luna: How does the Fed actually do that? Do they have a target level for the TGA? Lucas: The Fed doesn't set a target, but the Treasury has its own policy. Historically, the Treasury aimed to keep the TGA at around five to six percent of GDP, or roughly one week of outflows. That was the pre-pandemic norm. Now, with the debt ceiling issues, the Treasury has chosen to keep a larger buffer. As of now, it's around one trillion dollars, which is well above that old benchmark. Luna: So that's a lot of cash sitting on the Fed's balance sheet, earning nothing, effectively. But it's a buffer against government shutdowns or debt ceiling crises. Lucas: Exactly. And that buffer creates a drag on the economy because it's not being spent or invested. But it also provides stability. It's a trade-off that the Treasury is willing to make, especially given the political gridlock over the debt ceiling. Luna: The debt ceiling — that was a big theme in previous episodes. Is the TGA being used as a tool to manage around it? Lucas: Yes. The Treasury can use the TGA to manage cash flow under the debt ceiling, by drawing down the balance to keep paying bills without exceeding the limit. That's what happened in 2023. But it creates uncertainty because the TGA can swing wildly in a short period. Luna: And that uncertainty is exactly what the Fed has to navigate. So, what's the bottom line for the Fed's policy stance right now? Lucas: The bottom line is that the Fed is in a tight spot. It's trying to tighten financial conditions by shrinking its balance sheet, but the TGA could undermine that if the Treasury decides to spend down the balance. That's why we see reports about the Fed potentially having to adjust its quantitative tightening plans or even stop them earlier than expected. Luna: So the TGA is not just a footnote. It's a key variable in the Fed's policy calculus. Lucas: Absolutely. And it's a reminder that the Fed doesn't operate in a vacuum. Fiscal policy, Treasury cash management, and market expectations all feed into how monetary policy is transmitted. For anyone trying to understand the bond market or the economy, the TGA is a must-watch indicator. Luna: And it's a great example of how the Fed's job is as much about plumbing as it is about big-picture rates. Lucas: Exactly. So, the next time you see a headline about the Treasury General Account, you know it's not just some obscure accounting term. It's a lever that can move markets and shape the Fed's decisions. And that's a pretty concrete thing to keep an eye on. Luna: I think that's a good takeaway. One last thought — with the TGA potentially fueling buybacks, could that actually help liquidity in the Treasury market, or just add more complexity? Lucas: It's a mixed bag. Buybacks could improve liquidity by making it easier to trade older securities, but they also inject reserves, which could complicate the Fed's balance-sheet plans. So it's a delicate balance, and we'll be watching closely. Luna: Well, that's a good note to end on. Thanks for listening, everyone.