What Is the US Treasury Up To?

In our weekly look at the Fed’s balance sheet, Tracking the Fed Balance Sheet, we noticed what we thought was anomalous behavior in the Treasury and the depository institutions’ reserve accounts. We believe we can show something is going on although the details of the implied transactions remain to be discovered. In short, the Treasury is borrowing money on a daily basis from the reserves that depository institutions have on deposit with the Fed. Our argument follows.

The Treasury maintains an account with the Fed shown in Table 8 of the H.4.1 statistical release as U.S. Treasury, General Account (WLTGAL) (click to expand).

As one can see in the data available, around September 2008 the account balance went nuts. We infer that either a policy or an operational change occurred with respect to the Treasury’s use of their account with the Fed.

Now consider this graph from January 2011 on. Since this is weekly data, we have zoomed in on the recent data to reduce the visual noise in the graph. Along with the Treasury account, we have plotted Other deposits held by depository institutions (WRESBAL) with a simple transform to invert the graph and place it over top of the Treasury account graph (click to expand).

This graph (FREDĀ® is a wonderful data tool but limited in scaling options. So the left scale is changes in millions of dollars and the right scales is changes in billions of dollars) shows what we had detected in the weekly data: that increases in the reserve account corresponded closely to decreases in the Treasury account and vice versa. Keep in mind that other factors affect reserve balances as well as the balanceĀ  in the Treasury account.

A Puzzle Remains – Why?

From the balance sheet, we tract Federal Reserve notes, net of F.R. Bank holdings (WCURCIR). This fluctuates both up and down by at most a few billion each week. If the Treasury wanted the cash their account balance represents, the transaction would be a transfer from the reserve account of depository institutions to the Treasury account (this is what we see on the balance sheet) followed by an immediate reversal and a corresponding increase in currency in circulation (this is what we don’t see). So the Fed is not withdrawing money for operational needs.

Our conclusion is that the Treasury is still borrowing money from depository institutions via the Fed’s balance sheet, but the transfer is strictly supportive of some off-balance sheet operation that began in 2008.

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