FILE PHOTO: A vehicle drives past the U.S. Treasury Department in Washington, D.C., U.S. December 13, 2020. Picture taken with a long exposure. REUTERS/Raphael Satter
When citizens or businesses receives a government cheque, they deposit it at their commercial bank, which presents it to the Fed. The Fed then debits the Treasury’s account and credits the bank’s account at the Fed - increasing its reserve balance.But the Fed’s liabilities must match its assets. So a drop in the TGA must see a rise in bank reserves and vice versa. Last year’s reserves drain was masked by the Fed’s $3 trillion in asset purchases.
This year, it plans to run down the balance, slashing first-quarter borrowing plans to a quarter of initial estimates.What’s more, less Treasury borrowing is seen impacting its main funding avenue of recent years - T-bills and cash management bills, cash-like securities banks use as collateral for repo borrowing and hedging derivative trades.
He noted a “surfeit of liquidity and a lack of places to put it - hence the rally in short-rates to almost zero, with the risk of their going negative and the complete lack of bids in recent New York Fed repo operations”. And if relative ‘real’, inflation-adjusted Treasury yields fall, it could weaken the dollar sharply - meaning that “at the global level the TGA effect will indeed prove highly significant”, King added.Some such as King see clear risks.
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