THE MONETARY LETTER - US Treasury Term Investment Option 
Proposal  

Tom Yarnall - July 2002

Peter R. Fisher, Treasury Undersecretary for Domestic Finance and former New York Fed Executive VP, is in the process of beginning his own open market operation at the US Treasury Department. Proposed is the US Treasury investing its excess cash balances by participating in the market for repurchase agreements. The stated considerations are an investment return for the Treasury on idle moneys and commercial banks that have apparently reached the collateral limit ($55 billion) of what Treasury moneys they are able to hold (and use) in loan note accounts. Longtime readers of this writing will know the Treasury Tax and Loan (TT&L) accounts have been a topic here from time to time.

The essence of the proposed Treasury involvement in the repo market is a cash injection, just as the Fed does, and just as we track in the Fed RP outstanding in the top plot on the graphics page. All readers will, of course, also know that balances in the Treasury's accounts do have a seasonal surge.

Briefly, the Treasury maintains its working balances at the Fed for making and receiving payments on behalf of the government. Too, since they involve the transfer of funds from the banking system to the Fed, increases in these balances absorb reserves. The Treasury keeps its operating balance at the New York Fed near to $5 billion by transferring funds, as required, from its Treasury Tax & Loan accounts at commercial banks which serve as collection points for tax receipts. The note option banks have use of the Treasury's funds for loans and investments. The $5 billion balance is a figure easily verified by reviewing weekly statistical releases.

Although I suspect that Mr. Fisher has already made his debut in the marketplace as a Treasury official, he may eventually have a more regular opportunity to do so.

Mr. Fisher may not find a conflict in this type of operation; nevertheless, he is no longer an official employee of a politically independent organization. To lead operations that involve injecting cash liquidity into the financial markets may involve proprietary political considerations, or moral hazard, the knowledge of which no other public entity than you and I are ever likely to have. First among the probable political considerations are this year's Autumn elections and a US presidential campaign that begins next year.

It has also been recommended that the Treasury, in its repo operations, purchase a wide variety of securities, including agency and mortgage-backed issues.

 

Without the means to buy or maintain lower mortgage rates with reverse Treasury auctions (buybacks), term repo is the next best alternative.

With widespread and lower predictions for stock market performance in the years ahead, and American consumers fairly stretched in their ability to sustain the current rate of retail consumption, a means to ensure the continued vitality of the housing market must be explored in order to ensure economic performance going forward. See, also, political considerations mentioned immediately above.

Let's not forget, too, the switch over the past several years of enormous amounts of private and official offshore moneys out of US Treasury debt and into that of the federal home loan agencies. A chart depicting this change of preference can be located in the April 8th letter.

Minutes of the Meeting of the Treasury Borrowing Advisory Committee [Tue April 30, 2002 9:00A]

Final Treasury Term Repo Letter  [Fri June 28, 2002 3:39P]

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