Fed's Balance Sheet & TGA: Analyzing Powell's Potential Shift and Treasury's Role

Powell's Potential Balance Sheet Shift and the TGA Implications

Federal Reserve Chairman Jerome Powell recently hinted at a possible pause in the central bank's balance sheet reduction in the coming months, sparking discussion about the impact on the bond market and US Treasury. However, Powell stopped short of addressing the pivotal role the US Treasury Department is playing in this situation.

The Impact of Increased Short-Term Treasury Bill Supply

The Treasury has been increasing the supply of short-term Treasury bills (T-bills, maturing in one year or less), a move that necessitates the federal government maintaining a higher checking account balance. Notably, the target balance in the so-called "Treasury General Account" (TGA) has been $850 billion for most of the past year. Analysts predict this balance could rise to at least $900 billion in the next quarterly update, scheduled for November 3rd.

How the TGA Affects Bank Reserves

Samuel Earl, a strategist at Barclays, points out that the Fed's reduction of Treasury holdings reduces the size of reserves in the US banking system – currently around $3 trillion, nearing what's considered an "ample" level. A growing TGA balance would further deplete reserves, increasing pressure on the Fed to halt its balance sheet runoff, and potentially even requiring eventual expansion.

Expectations of Fed Balance Sheet Expansion

"The Fed will ultimately need to start expanding its balance sheet to keep pace with the growth of these non-reserve liabilities," Earl wrote in an October 14 report. He also mentioned that the Treasury's large-scale issuance of short-term T-bills "requires the TGA balance to keep increasing, meaning the Fed should perhaps view 'TGA balance near $950 billion by year-end' as an upside risk."

Unexpected Increase in Net Treasury Issuance

Bank of America data shows that the increase in the weekly short-term T-bill auction sizes suggests net T-bill issuance this month is around $146 billion, $80 billion more than expected.

Treasury's Policy Regarding the TGA

The increased supply of short-term T-bills necessitates a higher TGA balance to match cash flows. The Treasury's policy is to maintain the TGA balance at a level "sufficient to cover one week of outlays plus total maturing marketable debt." Acting Assistant Secretary for Financial Markets, Hunter McMaster, reiterated this at the New York Fed's annual primary dealer meeting last month.

Projected Adjustment to TGA Balance Target

Lou Crandall, Senior Economist at Wrightson ICAP, wrote on October 14 that the official quarter-end target for the TGA balance has been stable at $850 billion for most of the past year; "in the new quarterly borrowing estimates scheduled for release on November 3, this target is likely to be raised to $900 billion, and we think it is very likely that the balance will rise to that level in the first half of next year."

Additional Analysis: Other Factors Influencing the Fed's Balance Sheet

Beyond the factors mentioned above, several other elements can impact the size and composition of the Fed's balance sheet. These include global demand for US dollars, changes in interest rates, and overall economic conditions. Closely monitoring these factors is crucial for assessing their potential impact on monetary policy.

Conclusion

The interplay between the Federal Reserve and Treasury Department's decisions is complex and multi-faceted. However, by understanding the key drivers influencing the Fed's balance sheet and the Treasury General Account, we can gain valuable insights into future developments in monetary policy and its impact on the economy.