The Federal Reserve’s liquidity machine continues “full speed ahead”!
In the banking week ending February 16, 2011, the Fed injected almost $31 billion in new reserve balances into the banking system.
Over the past two banking weeks the Fed has pushed almost $140 billion in new reserve balances into the banking system.
Since the end of 2010 (the banking week ending December 29, 2010) the Fed has increased reserve balances with Federal Reserve Banks by almost $200 billion!
Thus, reserve balances at the Fed, a proxy for excess reserves in the banking system, have increased by a whopping 20% over the past six weeks.
The Federal Reserve is doing to the banking system what it said it was going to do.
In the fall of 2008 and winter of 2009, Chairman Ben Bernanke tossed as much Spaghetti against the wall as he could toss to see what would stick.
It appears that we are not necessarily in the middle of Quantitative Easing 2 (QE2), but are instead in the middle of Spaghetti Toss 2 (ST2)!
The Fed continued to buy more government securities last week, increasing its portfolio by about $23 billion. This supplied reserve funds to the banking system.
The big increase in bank reserves came, once again, in the U. S. Treasury Supplementary Financing Account. (For more on this account and its use see my post http://seekingalpha.com/article/199444-the-fed-s-new-exit-strategy) This account declined by $25 billion for the second week in a row. When this account increases it “absorbs” funds from the banking system. Therefore, when it declines it releases funds into the banking system.
Thus, over the past two weeks when reserve balances rose by almost $140 billion, $50 billion of the increase came from the Fed adding more Government securities to its portfolio and $50 billion came from the Treasury releasing funds to the banking system from its supplementary financing account.
Since December 29 when reserve balances rose by almost $200 billion the Fed bought almost $140 billion in government securities (about $34 billion going to offset maturing mortgage-backed securities), the Treasury reduced its Supplementary Financing Account by $50 billion AND reduced its General Account by almost $35 billion.
This last movement was the usual seasonal swing from the build up in tax revenues toward the end of a calendar year. It still puts reserves into the banking system.
To put things into perspective: Remember back in August 2008, the total reserves in the banking system were $46 billion and excess reserves were less than $2 billion.
Now, within the span of six weeks the Federal Reserve injected into the banking system four times the amount of total reserves that was held by the whole banking system at that time. The wave that is coming looks like it is a part of a Tsunami!
Showing posts with label Supplemental Financing Account. Show all posts
Showing posts with label Supplemental Financing Account. Show all posts
Friday, February 18, 2011
Monday, April 19, 2010
The New Way for the Fed to "Exit"?
Has the Federal Reserve begun its exit strategy? Has the Fed already started the “Great Undoing”? It has, but the new exit movement is not taking place in open market operations…or in repurchase agreements. It is occurring with the help of the Treasury Department. Let’s look at the line item on the Fed’s balance sheet titled “U. S. Treasury, supplementary financing account”.
The Federal Reserve defines the U. S. Treasury, supplementary financing account in this way:
“U.S. Treasury, supplementary financing account: With the dramatic expansion of the Federal Reserve's liquidity facilities, the Treasury agreed to establish the Supplementary Financing Program with the Federal Reserve. Under the Supplementary Financing Program, the Treasury issues debt and places the proceeds in the Supplementary Financing Account. The effect of the account is to drain balances from the deposits of depository institutions, helping to offset, somewhat, the rapid rise in balances that resulted from the various Federal Reserve liquidity facilities.”
Thus, this account is a deposit facility of the Federal Reserve similar to the U. S. Treasury, general account, the account that the Treasury conducts its general business from. Thus, it is a factor “absorbing reserve funds”, or, in other words, placing funds in this account removes reserves from the banking system. Hence, it contributes to the “exit” of the Fed from its inflated balance sheet.
I posted a note on this account on February 24, 2010 titled “The Treasury’s Latest Maneuver With the Fed”: http://seekingalpha.com/article/190404-the-treasury-s-latest-maneuver-with-the-fed. In that note I described what was going on in the following way: “On September 17, 2008, the Treasury Department announced something called the ‘Supplementary Financing Program.’ Under this program the Treasury was to issue marketable debt and deposit the proceeds in an account that would be separate from the General Account of the Treasury at the Fed.
In September 2008, this account averaged almost $80 billion. In November 2008 it was above $500 billion. The account dropped to just below $200 billion in January 2009 and remained around that level into September 2009. The figure drops precipitously from there as the issue about the debt limit of the Federal Government had to be dealt with. In January and February 2010, the account averaged just $5 billion.
Now that the Congress has raised the debt limit on the government, the plan has been revived.
The original purpose of the Supplemental Financing Account was to get cash into the hands of those that needed funds and not have to go through the market system which would take more time and, perhaps, a greater amount of trading, to meet the peak liquidity demands in the financial crisis. That is, the Treasury had cash to spend out of this account that could go directly to those that needed the stimulus spending. This program allowed the Treasury to issue securities without going directly to the market and perhaps keeping interest rates from falling.
In the present case, the Treasury says that it is going to keep the cash proceeds from the borrowing on deposit at the Federal Reserve. If this is true, then it seems that what the arrangement is providing is more Treasury securities to the Fed to be used as the central bank reduces the amount of excess reserves in the banking system.”
In recent weeks a lot of activity has taken place in this account. As stated in the post on February 24, 2010, there were $5 billion on deposit in this account.
On March 3, this balance was just under $25 billion. The balance rose to about $50 billion on March 10, around $75 billion on March 17, and near $100 billion on March 24. Again it rose to about $125 billion on April 1, $150 billion on April 8, and $175 billion on April 15.
Obviously, the plan is for this account to increase by $25 billion every week until the Treasury reaches its stated goal of $200 billion in this supplemental financing account.
What impact has this had on bank reserves?
Well, on February 24, factors, other than reserve balances, absorbing reserve funds totaled $1.082 trillion. On April 14, this total was $1.320 trillion, an increase of $238 billion. Reserve balances at Federal Reserve banks declined from $1.246 trillion on February 24 to $1.061 trillion on April 14, a fall of $185 billion.
The latest information we have on excess reserves in the banking system indicates that for the two banking weeks ending April 7, excess reserves averaged about $1.094 trillion, a decline of about $100 billion from the average that existed for the two banking weeks ending February 24 of $1.092 trillion.
Thus, this “maneuver” accomplishes two things. First, it is connected with the issuance of Treasury debt to finance the huge budget deficits of the government. Second, the proceeds of the debt issuance do not stay in the banking system, but are withdrawn and put on deposit at the Federal Reserve so that excess reserves are drained from the banking system.
Therefore, the Federal Reserve, with the help of the Treasury Department, has begun to exit!
One could argue that these reserves are coming out of the banking system willingly. That is, the big concern associated with the “Great Undoing” is that the Fed would take reserves out of the banking system that the commercial banks really wanted to “hang onto.” If this were to take place we might get a replay of the 1937 actions of the Federal Reserve when it took excess reserves out of the banking system that the banks wanted to hold onto which resulted in the contraction of bank lending contributing to the 1937-38 depression.
Removing reserves in this way, with the help of the Treasury, might be a benign way to begin the “undoing” which can then be followed up by more traditional central bank operations using repurchase agreements and outright sales of securities. Also, it takes pressure off the Fed in that open market operations could just focus on the Fed’s holdings of U. S. Treasury securities leaving the Fed’s portfolio of mortgage-backed securities and Federal Agency securities free to just decline by attrition. The Fed has only about $777 billion in Treasury securities in its portfolio and, depending upon how much it needs to reduce the excess reserves in the banking system, would probably not want to be forced to use other other parts of its portfolio in removing these reserves.
So, we observe another financial innovation on the part of the government. Niall Ferguson has argued that, historically, governments have been the biggest innovator when it comes to finance. The reason? Governments have been the largest issuers of debt and have had to be very creative in finding new ways to place debt and to manage debt. Certainly in the last fifty years, governments have shown themselves very adept at coming up with new ways to spend money…and to finance this spending.
The Federal Reserve defines the U. S. Treasury, supplementary financing account in this way:
“U.S. Treasury, supplementary financing account: With the dramatic expansion of the Federal Reserve's liquidity facilities, the Treasury agreed to establish the Supplementary Financing Program with the Federal Reserve. Under the Supplementary Financing Program, the Treasury issues debt and places the proceeds in the Supplementary Financing Account. The effect of the account is to drain balances from the deposits of depository institutions, helping to offset, somewhat, the rapid rise in balances that resulted from the various Federal Reserve liquidity facilities.”
Thus, this account is a deposit facility of the Federal Reserve similar to the U. S. Treasury, general account, the account that the Treasury conducts its general business from. Thus, it is a factor “absorbing reserve funds”, or, in other words, placing funds in this account removes reserves from the banking system. Hence, it contributes to the “exit” of the Fed from its inflated balance sheet.
I posted a note on this account on February 24, 2010 titled “The Treasury’s Latest Maneuver With the Fed”: http://seekingalpha.com/article/190404-the-treasury-s-latest-maneuver-with-the-fed. In that note I described what was going on in the following way: “On September 17, 2008, the Treasury Department announced something called the ‘Supplementary Financing Program.’ Under this program the Treasury was to issue marketable debt and deposit the proceeds in an account that would be separate from the General Account of the Treasury at the Fed.
In September 2008, this account averaged almost $80 billion. In November 2008 it was above $500 billion. The account dropped to just below $200 billion in January 2009 and remained around that level into September 2009. The figure drops precipitously from there as the issue about the debt limit of the Federal Government had to be dealt with. In January and February 2010, the account averaged just $5 billion.
Now that the Congress has raised the debt limit on the government, the plan has been revived.
The original purpose of the Supplemental Financing Account was to get cash into the hands of those that needed funds and not have to go through the market system which would take more time and, perhaps, a greater amount of trading, to meet the peak liquidity demands in the financial crisis. That is, the Treasury had cash to spend out of this account that could go directly to those that needed the stimulus spending. This program allowed the Treasury to issue securities without going directly to the market and perhaps keeping interest rates from falling.
In the present case, the Treasury says that it is going to keep the cash proceeds from the borrowing on deposit at the Federal Reserve. If this is true, then it seems that what the arrangement is providing is more Treasury securities to the Fed to be used as the central bank reduces the amount of excess reserves in the banking system.”
In recent weeks a lot of activity has taken place in this account. As stated in the post on February 24, 2010, there were $5 billion on deposit in this account.
On March 3, this balance was just under $25 billion. The balance rose to about $50 billion on March 10, around $75 billion on March 17, and near $100 billion on March 24. Again it rose to about $125 billion on April 1, $150 billion on April 8, and $175 billion on April 15.
Obviously, the plan is for this account to increase by $25 billion every week until the Treasury reaches its stated goal of $200 billion in this supplemental financing account.
What impact has this had on bank reserves?
Well, on February 24, factors, other than reserve balances, absorbing reserve funds totaled $1.082 trillion. On April 14, this total was $1.320 trillion, an increase of $238 billion. Reserve balances at Federal Reserve banks declined from $1.246 trillion on February 24 to $1.061 trillion on April 14, a fall of $185 billion.
The latest information we have on excess reserves in the banking system indicates that for the two banking weeks ending April 7, excess reserves averaged about $1.094 trillion, a decline of about $100 billion from the average that existed for the two banking weeks ending February 24 of $1.092 trillion.
Thus, this “maneuver” accomplishes two things. First, it is connected with the issuance of Treasury debt to finance the huge budget deficits of the government. Second, the proceeds of the debt issuance do not stay in the banking system, but are withdrawn and put on deposit at the Federal Reserve so that excess reserves are drained from the banking system.
Therefore, the Federal Reserve, with the help of the Treasury Department, has begun to exit!
One could argue that these reserves are coming out of the banking system willingly. That is, the big concern associated with the “Great Undoing” is that the Fed would take reserves out of the banking system that the commercial banks really wanted to “hang onto.” If this were to take place we might get a replay of the 1937 actions of the Federal Reserve when it took excess reserves out of the banking system that the banks wanted to hold onto which resulted in the contraction of bank lending contributing to the 1937-38 depression.
Removing reserves in this way, with the help of the Treasury, might be a benign way to begin the “undoing” which can then be followed up by more traditional central bank operations using repurchase agreements and outright sales of securities. Also, it takes pressure off the Fed in that open market operations could just focus on the Fed’s holdings of U. S. Treasury securities leaving the Fed’s portfolio of mortgage-backed securities and Federal Agency securities free to just decline by attrition. The Fed has only about $777 billion in Treasury securities in its portfolio and, depending upon how much it needs to reduce the excess reserves in the banking system, would probably not want to be forced to use other other parts of its portfolio in removing these reserves.
So, we observe another financial innovation on the part of the government. Niall Ferguson has argued that, historically, governments have been the biggest innovator when it comes to finance. The reason? Governments have been the largest issuers of debt and have had to be very creative in finding new ways to place debt and to manage debt. Certainly in the last fifty years, governments have shown themselves very adept at coming up with new ways to spend money…and to finance this spending.
Friday, April 2, 2010
Federal Reserve Exit Watch: Part 9
The operating statement of the Federal Reserve is getting downright boring these days. Thank goodness! It brings back memories of the good old days when nobody really cared much about the Fed’s balance sheet or what the Fed was really doing operationally.
I remember calling a friend of mine at the Fed in February 2008. I had a question. There was a new thing called “Central Bank Liquidity Swaps” and I was trying to locate where it was on the Fed’s H.4.1 release, the “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” At that time, because it was brand new, it didn’t have a separate line item to indicate what the Fed was doing with currency swaps with other central banks. I presumed that the numbers were added into the account “Other Federal Reserve Assets” which had changed substantially in recent weeks and was, formerly, just a miscellaneous collection of a number of different unimportant accounts.
After confirming that the “Other Federal Reserve Assets” contained the information on “Central Bank Liquidity Swaps”, my friend asked me why I was interested in writing about this in my new blog. “Nobody is interested in the Federal Reserve statement. You are just wasting your time!” he said.
Obviously, over the next 24 months or so, a lot of people got interested in the Federal Reserve statement. If we want to talk about financial innovation in the last twenty or thirty years, what happened inside the Fed during this period of time certainly represents some of most important “financial innovation” that took place. To not watch what the Fed was doing with its balance sheet was to miss a large part of the show.
Now, that show is coming to a dull close. Again, we can be very thankful for this. In the banking sector, “DULL IS GOOD!”
First, the Fed had supplied approximated $2.349 trillion in funds to the commercial banking system on March 31, 2010. I estimate that at most $200 billion of these funds are related to the special programs that were created over the past two and one-half years, only about 8.5%. These $200 billion in assets will slowly trickle off the Fed’s statement and will cause very little impact, if any, on the banking system or on financial markets. Good riddance!
Of course, the other $2.1 trillion in funds that the Fed has supplied to the banking system still looms over the financial markets and the economy because almost $1.1 trillion of those funds are residing in commercial bank reserve balances at Federal Reserve banks. In other words, the commercial banking system possesses about $1.1 trillion in excess reserves.
But, the situation is “boring” now because on March 31, 2010, the securities portfolio of the Federal Reserve amounted to slightly more than $2.0 trillion: $777 billion in U. S. Treasury securities; $169 billion in Federal Agency debt securities; and $1,069 billion in Mortgage-backed securities. The removal of funds from the banking system in the Federal Reserve exit strategy, we are told, will come from selling these securities through outright sales or, initially, through repurchase agreements. This is where most of the action will be in the future.
There is another vehicle that the Federal Reserve has cooked up with the U. S. Treasury Department to drain some reserves from the banking system using an account of the Treasury’s at the Fed. This is the “U. S. Treasury, supplementary financing account” and it appears as a liability of the Federal Reserve. (See my post of February which describes this facility: http://seekingalpha.com/article/190404-the-treasury-s-latest-maneuver-with-the-fed.) An increase in this account absorbs funds from the banking system so it can be used to remove reserves along with the Fed operations in its securities portfolio.
At the end of 2009, this supplementary financing account was at $5.0 billion. The Treasury Department had to wait until Congress raised the United States debt limit before it could again rebuild this account. The account has risen by $120 billion since December 30, 2009 and by $100 billion since March 3, 2010. This has helped to keep reserve balances at the Fed relatively constant since the end of the year while the Fed was, at the same time, supplying reserves to the financial markets during this time by buying mortgage-backed securities.
So, in the last 13-week period, the financial markets were relatively calm, the commercial banking system was peaceful, and the Fed did practically nothing except buy $160 billion more mortgage backed securities. The question is, “Is this the calm before the storm?”
No one knows how the “Great Undoing” is going to proceed. The Fed has stopped buying mortgage-backed securities as it promised it would do. There has been some reaction in the financial markets (See “Mortgage Risk Premiums Widen”: http://online.wsj.com/article/SB20001424052702304539404575157612509328610.html#mod=todays_us_money_and_investing.) Mortgage rates have also risen. We are told that “A lot of people are observing what’s going to happen now that the Fed is actually out.”
Now the waiting begins. The Fed has confirmed that it will continue to keep its target interest rate range at current levels for the near term. There are still many uncertainties in the economy that are keeping the Fed from removing the reserves from the banking system and raising its target interest rate range. One of these, of course, is the state of the economy. Economic growth continues to remain anemic, although it seems to be picking up, and the unemployment rate continues to hover around 10.0%.
Furthermore, the health of the banking system, itself, remains questionable as about one in eight banks remain on the problem bank list or near to it. Bankruptcies continue to rise (http://www.nytimes.com/2010/04/02/business/economy/02bankruptcy.html?ref=business) as do foreclosures on homes. We are still waiting to see how the commercial real estate industry works through the next 12 months or so. The Federal Reserve does not want to remove reserves from the banking system if the banking system “wants” to keep those reserves to protect itself during the continuing financial workout period.
The Fed is now as ready as it ever will be to execute its “Great Undoing”. We continue to need to watch the Fed’s balance sheet to observe what the Fed is actually doing with its portfolio of securities and how the Treasury Department is contributing to the removal of reserves through the manipulation of its supplementary financing account.
As with the banking system itself, the thing to hope over the next year or so is for in the actual execution of the Fed’s exit strategy to be accomplished in an orderly fashion. Keep your fingers crossed!
I remember calling a friend of mine at the Fed in February 2008. I had a question. There was a new thing called “Central Bank Liquidity Swaps” and I was trying to locate where it was on the Fed’s H.4.1 release, the “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” At that time, because it was brand new, it didn’t have a separate line item to indicate what the Fed was doing with currency swaps with other central banks. I presumed that the numbers were added into the account “Other Federal Reserve Assets” which had changed substantially in recent weeks and was, formerly, just a miscellaneous collection of a number of different unimportant accounts.
After confirming that the “Other Federal Reserve Assets” contained the information on “Central Bank Liquidity Swaps”, my friend asked me why I was interested in writing about this in my new blog. “Nobody is interested in the Federal Reserve statement. You are just wasting your time!” he said.
Obviously, over the next 24 months or so, a lot of people got interested in the Federal Reserve statement. If we want to talk about financial innovation in the last twenty or thirty years, what happened inside the Fed during this period of time certainly represents some of most important “financial innovation” that took place. To not watch what the Fed was doing with its balance sheet was to miss a large part of the show.
Now, that show is coming to a dull close. Again, we can be very thankful for this. In the banking sector, “DULL IS GOOD!”
First, the Fed had supplied approximated $2.349 trillion in funds to the commercial banking system on March 31, 2010. I estimate that at most $200 billion of these funds are related to the special programs that were created over the past two and one-half years, only about 8.5%. These $200 billion in assets will slowly trickle off the Fed’s statement and will cause very little impact, if any, on the banking system or on financial markets. Good riddance!
Of course, the other $2.1 trillion in funds that the Fed has supplied to the banking system still looms over the financial markets and the economy because almost $1.1 trillion of those funds are residing in commercial bank reserve balances at Federal Reserve banks. In other words, the commercial banking system possesses about $1.1 trillion in excess reserves.
But, the situation is “boring” now because on March 31, 2010, the securities portfolio of the Federal Reserve amounted to slightly more than $2.0 trillion: $777 billion in U. S. Treasury securities; $169 billion in Federal Agency debt securities; and $1,069 billion in Mortgage-backed securities. The removal of funds from the banking system in the Federal Reserve exit strategy, we are told, will come from selling these securities through outright sales or, initially, through repurchase agreements. This is where most of the action will be in the future.
There is another vehicle that the Federal Reserve has cooked up with the U. S. Treasury Department to drain some reserves from the banking system using an account of the Treasury’s at the Fed. This is the “U. S. Treasury, supplementary financing account” and it appears as a liability of the Federal Reserve. (See my post of February which describes this facility: http://seekingalpha.com/article/190404-the-treasury-s-latest-maneuver-with-the-fed.) An increase in this account absorbs funds from the banking system so it can be used to remove reserves along with the Fed operations in its securities portfolio.
At the end of 2009, this supplementary financing account was at $5.0 billion. The Treasury Department had to wait until Congress raised the United States debt limit before it could again rebuild this account. The account has risen by $120 billion since December 30, 2009 and by $100 billion since March 3, 2010. This has helped to keep reserve balances at the Fed relatively constant since the end of the year while the Fed was, at the same time, supplying reserves to the financial markets during this time by buying mortgage-backed securities.
So, in the last 13-week period, the financial markets were relatively calm, the commercial banking system was peaceful, and the Fed did practically nothing except buy $160 billion more mortgage backed securities. The question is, “Is this the calm before the storm?”
No one knows how the “Great Undoing” is going to proceed. The Fed has stopped buying mortgage-backed securities as it promised it would do. There has been some reaction in the financial markets (See “Mortgage Risk Premiums Widen”: http://online.wsj.com/article/SB20001424052702304539404575157612509328610.html#mod=todays_us_money_and_investing.) Mortgage rates have also risen. We are told that “A lot of people are observing what’s going to happen now that the Fed is actually out.”
Now the waiting begins. The Fed has confirmed that it will continue to keep its target interest rate range at current levels for the near term. There are still many uncertainties in the economy that are keeping the Fed from removing the reserves from the banking system and raising its target interest rate range. One of these, of course, is the state of the economy. Economic growth continues to remain anemic, although it seems to be picking up, and the unemployment rate continues to hover around 10.0%.
Furthermore, the health of the banking system, itself, remains questionable as about one in eight banks remain on the problem bank list or near to it. Bankruptcies continue to rise (http://www.nytimes.com/2010/04/02/business/economy/02bankruptcy.html?ref=business) as do foreclosures on homes. We are still waiting to see how the commercial real estate industry works through the next 12 months or so. The Federal Reserve does not want to remove reserves from the banking system if the banking system “wants” to keep those reserves to protect itself during the continuing financial workout period.
The Fed is now as ready as it ever will be to execute its “Great Undoing”. We continue to need to watch the Fed’s balance sheet to observe what the Fed is actually doing with its portfolio of securities and how the Treasury Department is contributing to the removal of reserves through the manipulation of its supplementary financing account.
As with the banking system itself, the thing to hope over the next year or so is for in the actual execution of the Fed’s exit strategy to be accomplished in an orderly fashion. Keep your fingers crossed!
Wednesday, February 24, 2010
The Fed and the Treasury Maneuver
Yesterday, the Treasury announced that it will borrow $200 billion from the Federal Reserve and leave the cash on deposit with the Fed. As it initially goes on the Fed’s balance sheet the transaction is a wash.
The Treasury has two accounts that show up on the Federal Reserve sources and uses statement. (These data can be found on the Federal Reserve release H. 4.1, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.) The first is called the U. S. Treasury, General Account, and this is primarily used to manage the Treasury’s cash position and flow of expenditures and tax receipts.
When taxes are collected, the funds flow into government tax and loan accounts at commercial banks. This transfer of funds from the private sector to the public sector causes no disruption to bank reserves because the funds stay in the banking system. (The data on U. S. Government deposits at commercial banks can be obtained in the Federal Reserve release H.6, Money Stock measures, Table 7.)
The Treasury does not draw funds out of its accounts in the commercial banking system until it begins to make payments out of its balance in the General Account at the Federal Reserve so as to cause as little disruption to the reserves held in the banking system. That is, government funds come out of the banking system and go into the Fed account, but the Fed account is being drawn down with payments to the private sector that will be deposited into commercial bank deposits.
For example, government demand deposits at commercial banks averaged $1.3 billion in December 2009. However, in January, as tax collections flowed into the government, these balances rose to $1.6 billion in the banking week ending January 4 and increased to $2.3 billion, $4.3 billion, and $5.1 billion, in the next three weeks, respectively. In the banking week ending February 1 the balances fell to $1.8 billion and then dropped to $1.3 billion in the following week as the Treasury paid out funds to the private sector.
These movements just represent operational procedures that have been established over the years to avoid major movements of funds into and out of governmental accounts. Hence, this is called the “General Account.”
On September 17, 2008, the Treasury Department announced something called the “Supplementary Financing Program”. Under this program the Treasury was to issue marketable debt and deposit the proceeds in an account that would be separate from the General Account of the Treasury at the Fed.
Thus, the Fed’s holdings of U. S. Treasury holdings would go up on the “asset” side of the balance sheet (this being a debt of the Treasury) and the U. S. Treasury Supplementary Financing Account would rise on the “liability” side of the balance sheet (this being an asset of the Treasury).
In September 2008, this account averaged almost $80 billion. In November 2008 it was above $500 billion. The account dropped to just below $200 billion in January 2009 and remained around that level into September 2009. The figure drops precipitously from there as the issue about the debt limit of the Federal Government had to be dealt with. In January and February 2010, the account averaged just $5 billion.
Now that the Congress has raised the debt limit on the government, the plan has been revived.
The original purpose of the Supplemental Financing Account was to get cash into the hands of those that needed funds and not have to go through the market system which would take more time and, perhaps, a greater amount of trading, to meet the peak liquidity demands in the financial crisis. That is, the Treasury had cash to spend out of this account that could go directly to those that needed the stimulus spending. This program allowed the Treasury to issue securities without going directly to the market and perhaps keeping interest rates from falling.
In the present case, the Treasury says that it is going to keep the cash proceeds from the borrowing on deposit at the Federal Reserve. If this is true, then it seems that what the arrangement is providing is more Treasury securities to the Fed to be used as the central bank reduces the amount of excess reserves in the banking system.
On February 17, 2010, the Federal Reserve had a little less than $800 billion of U. S. Treasury securities on its balance sheet. Commercial bank reserve balances, mostly excess reserves, with Federal Reserve banks stood at slightly more than $1.2 trillion.
If the Fed is going to remove reserves from the banking system by open market sales of U. S. Treasury securities, then it needs to have a sufficient amount of them on hand to be a credible seller of these securities.
Although the Federal Reserve is expected to have $1.25 trillion of mortgage-backed securities in its portfolio in March, it is expected that the Fed will not want to sell these off in any large amounts because it does not want to destabilize the mortgage market and force mortgage rates to rise too fast.
Also, the Fed’s portfolio of Federal Agency debt securities is too small, about $165 billion, to help much in any exit strategy.
Thus, adding $200 billion to the Fed’s portfolio of U. S. Treasury securities will bring the total Treasury securities on hand to approximately $1.0 trillion and this may be sufficient to allow the Fed to “undo” its portfolio and reduce the amount of excess reserves in the banking system without having to sell mortgage-backed securities. That is, if the Treasury does not write any checks against its Supplementary Financing Account.
The Fed is attempting to get as much ammunition in place before the “battle to exit” begins. Over the past several months and weeks, the Federal Reserve has moved to position itself to “undo” its massive injection of reserves into the banking system. Last week it announced that it was returning the “primary loan” function to its pre-crisis operating procedures. (See my “Back to Business at the Fed”: http://seekingalpha.com/article/189547-back-to-business-at-the-fed.) This week, the Treasury is pumping up its Supplemental Financing Account. Next week, well who knows.
This process will continue over the following weeks as the Fed does all it can to prepare for its “undoing.”
The Treasury has two accounts that show up on the Federal Reserve sources and uses statement. (These data can be found on the Federal Reserve release H. 4.1, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.) The first is called the U. S. Treasury, General Account, and this is primarily used to manage the Treasury’s cash position and flow of expenditures and tax receipts.
When taxes are collected, the funds flow into government tax and loan accounts at commercial banks. This transfer of funds from the private sector to the public sector causes no disruption to bank reserves because the funds stay in the banking system. (The data on U. S. Government deposits at commercial banks can be obtained in the Federal Reserve release H.6, Money Stock measures, Table 7.)
The Treasury does not draw funds out of its accounts in the commercial banking system until it begins to make payments out of its balance in the General Account at the Federal Reserve so as to cause as little disruption to the reserves held in the banking system. That is, government funds come out of the banking system and go into the Fed account, but the Fed account is being drawn down with payments to the private sector that will be deposited into commercial bank deposits.
For example, government demand deposits at commercial banks averaged $1.3 billion in December 2009. However, in January, as tax collections flowed into the government, these balances rose to $1.6 billion in the banking week ending January 4 and increased to $2.3 billion, $4.3 billion, and $5.1 billion, in the next three weeks, respectively. In the banking week ending February 1 the balances fell to $1.8 billion and then dropped to $1.3 billion in the following week as the Treasury paid out funds to the private sector.
These movements just represent operational procedures that have been established over the years to avoid major movements of funds into and out of governmental accounts. Hence, this is called the “General Account.”
On September 17, 2008, the Treasury Department announced something called the “Supplementary Financing Program”. Under this program the Treasury was to issue marketable debt and deposit the proceeds in an account that would be separate from the General Account of the Treasury at the Fed.
Thus, the Fed’s holdings of U. S. Treasury holdings would go up on the “asset” side of the balance sheet (this being a debt of the Treasury) and the U. S. Treasury Supplementary Financing Account would rise on the “liability” side of the balance sheet (this being an asset of the Treasury).
In September 2008, this account averaged almost $80 billion. In November 2008 it was above $500 billion. The account dropped to just below $200 billion in January 2009 and remained around that level into September 2009. The figure drops precipitously from there as the issue about the debt limit of the Federal Government had to be dealt with. In January and February 2010, the account averaged just $5 billion.
Now that the Congress has raised the debt limit on the government, the plan has been revived.
The original purpose of the Supplemental Financing Account was to get cash into the hands of those that needed funds and not have to go through the market system which would take more time and, perhaps, a greater amount of trading, to meet the peak liquidity demands in the financial crisis. That is, the Treasury had cash to spend out of this account that could go directly to those that needed the stimulus spending. This program allowed the Treasury to issue securities without going directly to the market and perhaps keeping interest rates from falling.
In the present case, the Treasury says that it is going to keep the cash proceeds from the borrowing on deposit at the Federal Reserve. If this is true, then it seems that what the arrangement is providing is more Treasury securities to the Fed to be used as the central bank reduces the amount of excess reserves in the banking system.
On February 17, 2010, the Federal Reserve had a little less than $800 billion of U. S. Treasury securities on its balance sheet. Commercial bank reserve balances, mostly excess reserves, with Federal Reserve banks stood at slightly more than $1.2 trillion.
If the Fed is going to remove reserves from the banking system by open market sales of U. S. Treasury securities, then it needs to have a sufficient amount of them on hand to be a credible seller of these securities.
Although the Federal Reserve is expected to have $1.25 trillion of mortgage-backed securities in its portfolio in March, it is expected that the Fed will not want to sell these off in any large amounts because it does not want to destabilize the mortgage market and force mortgage rates to rise too fast.
Also, the Fed’s portfolio of Federal Agency debt securities is too small, about $165 billion, to help much in any exit strategy.
Thus, adding $200 billion to the Fed’s portfolio of U. S. Treasury securities will bring the total Treasury securities on hand to approximately $1.0 trillion and this may be sufficient to allow the Fed to “undo” its portfolio and reduce the amount of excess reserves in the banking system without having to sell mortgage-backed securities. That is, if the Treasury does not write any checks against its Supplementary Financing Account.
The Fed is attempting to get as much ammunition in place before the “battle to exit” begins. Over the past several months and weeks, the Federal Reserve has moved to position itself to “undo” its massive injection of reserves into the banking system. Last week it announced that it was returning the “primary loan” function to its pre-crisis operating procedures. (See my “Back to Business at the Fed”: http://seekingalpha.com/article/189547-back-to-business-at-the-fed.) This week, the Treasury is pumping up its Supplemental Financing Account. Next week, well who knows.
This process will continue over the following weeks as the Fed does all it can to prepare for its “undoing.”
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