Taps Coogan – March 14th, 2023

Since April of 2022, the Federal Reserve’s balance sheet has shrunk $613.5 billion thanks to quantitative tightening (QT). All other things being equal, that should have sucked a corresponding $613.5 billion of liquidity out of financial markets as private sector buyers make up for the missing demand for Treasuries and Mortgage Back Securities.

However, the Treasury general account, the federal government’s ‘checking account’ at the Fed, started draining down at the same time. Quite remarkably, the Treasury general account has drained down by nearly the exact amount of the Fed’s QT program since last April: $611 billion.

The draining of the Treasury’s general account represents federal spending that would otherwise have been financed through new treasury debt issuance but was instead financed out of cash on hand.

In effect, the Treasury’s move to drain the general account instead of issuing new debt has fully offset QT up to this point.

Since the start of the year, the debt ceiling impasse has given the Treasury little choice in the matter but it’s worth noting that the draining started within a week of the launch of QT and about eight months before the debt ceiling was hit.

Eventually the debt ceiling will get raised and the Treasury will have to replenish its general account, which has shrunk from $944 billion last April to $333 billion today. While the Treasury may not refill the account all the way back up to $944 (an elevated balance), whatever amount they do raise the account by will impose a corresponding amount of as-of-now unfelt QT on the markets.