The Fed & Treasury Tug-of-War: TGA Balance & Balance Sheet Implications

Key Takeaways

• Examine the interplay between Fed balance sheet reduction and increased issuance of short-term Treasury bills.
• Analyze the impact of growing Treasury General Account (TGA) balances on bank reserves.
• Assess the pressure on the Fed to halt balance sheet runoff and potentially expand its balance sheet.
• Explore potential near-term TGA balance targets.

Federal Reserve Chairman Jerome Powell hinted on Tuesday at a possible halt to the reduction of the Fed's balance sheet in the coming months, with a particular focus on the role of the Treasury Department. The Treasury has been increasing the supply of short-term Treasury bills (maturities of one year or less), a move that implies the federal government needs to maintain higher checking account balances. For most of the past year, the target balance for the so-called Treasury General Account (TGA) has been $850 billion. Analysts suggest that in the next quarterly update, due November 3, that balance could rise to at least $900 billion.

Samuel Earl, a strategist at Barclays, points out that Fed balance sheet reduction reduces the size of reserves in the U.S. banking system – currently around $3 trillion, already approaching levels deemed “sufficient.” Growing TGA balances further deplete these reserves, adding pressure on the Fed to stop the runoff, and potentially requiring it to eventually expand its balance sheet.

“The Fed will eventually need to start growing its balance sheet to keep pace with the growth in these non-reserve liabilities,” Earl wrote in an October 14 report. He also noted that the large-scale issuance of short-term Treasury bills “requires a sustained increase in TGA balances, meaning the Fed should perhaps view ‘TGA balances approaching $950 billion by year-end’ as an upside risk.”

Data from Bank of America shows that the increase in the size of weekly short-term Treasury bill auctions implies net Treasury bill supply this month is around $146 billion, $80 billion more than anticipated.

The increase in short-term Treasury bill supply requires higher TGA balances to match cash flows. Treasury policy is to maintain TGA balances at a level “sufficient to cover one week of outlays plus total maturing marketable debt.” Acting Assistant Secretary for Financial Markets Hunter McMaster reiterated that point at the New York Fed’s annual primary dealer meeting last month.

Lou Crandall, senior economist at Wrightson ICAP, wrote on October 14 that the official quarter-end target TGA balance has been stable at $850 billion for most of the past year. “In the new quarterly borrowing estimates due November 3, that target is likely to be raised to $900 billion, and we think it is quite likely that the balance will be pushed to that level in the first half of next year.”