Treasury Finance in the U.S. Financial System

Abstract

Treasury finance plays a key role in an economy with four sectors identified as Treasury, Fed, Banks, and Nonbanks. Congress sets federal tax, credit, and spending policy which vary with the state of the economy. This causes autonomous changes of the federal balance sheet. Congress delegates control of monetary policy to Fed. To transmit monetary policy Fed controls the average interest rate charged on an overnight loan of reserve balances in the interbank fed funds market. To help Fed retain control of the fed funds rate Treasury applies cash management with a goal to minimize changes in levels of reserve balances caused by Treasury finance operations. During an accounting period Treasury applies debt management to cover the cash deficit or dispose of the cash surplus. Treasury borrows from the public to cover the unified budget deficit, to increase Treasury operating cash, and to cover cash disbursements driven by other changes in the federal balance sheet. Treasury pays off debt held by the public to dispose of the cash surplus caused by the unified budget and other changes in the federal balance sheet. Treasury altered its cash management activity during the financial crisis.