THE STASH SEPTEMBER 16, 2009
Deborah Solomon and Jon Hilsenrath at the WSJ inform us that, in order to keep from hitting the $12.1 billion trillion debt ceiling, the Treasury Department is winding down a one-year-old program it created to borrow funds on behalf of the Fed:
Since last year, the Treasury has been selling special short-term securities and placing the proceeds in an account at the Fed. The program, known as the Supplementary Financing Program, reached about $560 billion late last year, but has since fallen to about $200 billion, where it has remained throughout 2009...
The decision could also be controversial, since the program was put in place to help blunt any inflationary impact from emergency actions taken by the Federal Reserve.
But the end of the Treasury program is unlikely to spur inflation, given the Fed's ability to pay interest on reserves that banks keep on hand there. Both interest on reserves and the Treasury program are tools that can be used to blunt the inflationary impact of the Fed's balance sheet expansion.
When the Treasury program was announced in September 2008, Congress hadn't yet given the Fed the right to pay interest on reserves. But that changed when Congress passed TARP the following month -- albeit five months after Bernanke first asked for the authority -- so the Fed hasn't really needed the Treasury program since then. As David Wessel hints at in a nice primer on interest on reserves, the Fed has a lot of faith in this new tool. (It's worth noting that most of the expansion of the Fed's balance sheet didn't come until after it started paying interest on reserves -- nearly a month after the collapse of Lehman Brothers -- suggesting this is what gave it the confidence to undertake these bold moves.)
The Treasury’s move means the amount of Treasury bills available will shrink over the next six weeks by nearly 10 percent, said Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey. This will push rates down because of the high demand for bills, and it may have a similar effect on the federal funds rate, he said.
“The net result should be tighter bills supplies and a looser reserves market, giving rates even more of a downward bias in both sectors,” Crandall said.
In other words, an unexpected extra dosage of quantitative easing--the sort of unorthodox credit expansion Bernanke has experimented with since the beginning of the crisis.