The Beginning of an Occasional Blog

One of the disconcerting aspects of working for the government is reading misleading or inaccurate descriptions of policy and finding these difficult or impossible to correct. One of the purposes of this blog is to let me publish my observations about these descriptions, though at this point I don’t know if many will stumble on this blog to read them.

A case in point. A few months ago I read that the Treasury was issuing Treasury bills not because it needed the money but to enable the Fed to “expand its balance sheet.” But the Fed needs no help from Treasury to expand its balance sheet. All it needs to do is buy something or make a loan. When it does this, it credits a bank with reserves, which is a liability on the Fed’s balance sheet. The offsetting asset is whatever the Fed bought, most likely a security, or the loan it made. This process is often referred to as “printing money.” I prefer to call it “creating money,” since the former term may give some the impression that the Treasury’s Bureau of Engraving and Printing is operating at a feverish pace.

What really was going on was that the Fed’s holdings of unencumbered Treasury securities had fallen to a very low level as a result of its aggressive programs to help out the financial system. It was uncomfortable reducing its holdings of Treasury securities further to reduce the amount of bank reserves it had created through these programs. Therefore, it asked the Treasury to sell bills and deposit the resulting cash at the Fed.

This has the same effect on bank reserves that would result from the Fed selling Treasury securities from its portfolio. The only way the Treasury operation can be said to expand the Fed’s balance sheet is that the Treasury’s operation does not contract the Fed’s balance sheet but a Fed sale of Treasury securities does. In other words, the Fed’s balance sheet is larger than it would have been if the Treasury had not sold the bills but the Fed had achieved the same monetary policy effect through an open market operation.

In the U.S., it has long been thought to be a good idea to keep monetary and Treasury debt management policy separate. Treasury officials and others were most likely sensitive about the blurring of this line in undertaking this operation. It is normal for there to be coordination between the Treasury and the Fed on a daily basis with respect to Treasury cash management, given the flows of Treasury funds between the private banking system and the Fed, but directly using Treasury borrowing operations to assist in monetary policy is a new step.

If the Fed continues to find it necessary to ask the Treasury for help in carrying out monetary policy, this could lead to greater Treasury influence on monetary policy because it can always refuse a Fed request to borrow funds it does not need. The apparent goal of government officials was, if possible, for the issues surrounding the Treasury’s assistance to the Fed not to be raised. They succeeded.