The Federal Reserve has doled out tens of billions to calm the short-term lending markets after they went haywire in September.

But initiatives by the U.S. Treasury Department -- to ensure it always has enough cash to pay its bills as the deficit soars to a trillion dollars -- could make it harder for the Fed to prevent a repeat.

As the department copes with higher spending, large swings in the amount of money it has on deposit with the central bank have already undercut the Fed’s ability to keep bank reserves stable. Last year, one particularly big shift helped to drain so much liquidity from the banking system that it contributed to a spike in overnight lending rates.

Now, as Treasury considers setting aside even more money, market watchers say the swings are bound to get worse. That could lead to more disruptions and upend the Fed’s goal of scaling back its involvement in the repo market.

Treasury’s cash needs “have created dislocations that are putting greater strains on the Fed’s reserve management and funding markets,” said Ward McCarthy, chief financial economist at Jefferies & Co. and a former senior economist at the Richmond Fed. “But the Treasury needs to fund the government, so the Fed has to work around around that.”

The situation also underscores how America’s fiscal imbalance, which has been exacerbated by the combination of tax cuts and spending increases under the Trump administration, is putting strains on the financial system.

Though arcane even in finance circles, repurchase agreements -- or repos for short -- are what keep the global capital markets spinning. And that includes the $16.7 trillion market for U.S. government debt.

Big Swings

The Treasury General Account, as it’s officially known, operates like the government’s checking account at the Fed. Money comes in when taxes are paid out of bank accounts of individuals and corporations (which drains banks’ reserves held at the New York Fed) and money goes out when the government pays its bills (which does the opposite).

While the Fed has had to deal with fluctuations before, the sheer size and swings of the account in recent years stand out. Under the Obama administration, Treasury in 2015 instituted a policy of keeping at least five days’ worth of expenditures, or a minimum of $150 billion, in case unexpected disruptions from natural disasters or cyber attacks locked it out of the debt markets. Prior to the change, Treasury had enough cash for just two days.

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