But that cushion has grown and become more volatile as deficit spending rose and cash flows in and out of the account increased. And the fluctuations have at times been exacerbated when Congress dragged its heels on the debt limit.
Since the start of 2019, the account balance has averaged $303 billion, versus about $240 billion in the prior four years. It has also swung as high as $451 billion and dropped as low as $112 billion.
All that money flowing in and out of Treasury’s account has made it harder for the Fed to keep reserves in the banking system stable, and crucially, to manage monetary policy. That’s contributed to abrupt swings in repo rates, which spiked to 10% in mid-September.
The turmoil forced the Fed to step in with tens of billions of dollars in emergency repo financing. It also began to purchase $60 billion a month in T-bills to permanently lift reserves. The central bank has continued to backstop the repo market -- in various amounts and over various terms -- so it doesn’t seize up again. It has said it will continue its repo operations at least through April, but ultimately wants to step back from active involvement once reserves rise enough to ensure ample liquidity in the banking system.
Of course, one way Treasury could help is by keeping most of its cash in accounts of the nation’s commercial banks instead, as it did before the financial crisis. That would keep the Fed from having to manage the daily swings in Treasury’s cash cushion to prevent liquidity from drying up.
Treasury Secretary Steven Mnuchin isn’t convinced. In fact, he suggested such a shift could lead to even bigger financial-stability problems.
“If you’re a regulator, you wouldn’t want a major bank’s balance sheet to go up and down based upon what could be very, very large cash movements,” he told Bloomberg News in an interview last month. “It shouldn’t impact the market one way or another whether we put money at the Fed or at a bank.”
Fed Chairman Jerome Powell said in December that bank officials had yet to discuss the topic with their Treasury counterparts. Nevertheless, he added that “there may come a time when we talk about that.”
Even if there’s some kind of agreement between the two, some analysts say the best, and perhaps only, option for the Fed is to simply accept the fact that its repo operations have become a fact of life -- and to stand ready to provide more cash whenever it’s needed.
“The Fed should just plan to do repos, beyond just as an emergency tool, as needed,” said Wrightson ICAP’s Lou Crandall.