(Bloomberg) -- Unstated when Federal Reserve Chair Jerome Powell indicated Tuesday that the central bank is likely to stop shedding Treasury securities from its balance sheet in the coming months was the role of the Treasury Department in setting the stage.
The department has been increasing the supply of bills — Treasury securities that mature in a year or less — in a way that means the federal government needs to carry a larger checking-account balance. For most of the past year, the target balance for the so-called Treasury General Account has been $850 billion. The next quarterly update on Nov. 3 is likely to be around $900 billion, at least, according to analysts.
The Fed shedding Treasuries from its balance sheet lowers the quantity of reserves in the US banking system, which at around $3 trillion is approaching levels believed to be adequate. Growth in the TGA further drains reserves, increasing pressure on the central bank to stop the runoff, and will in time require a bigger balance sheet, Barclays strategist Samuel Earl says.
"The Fed will eventually need to start growing the balance sheet to keep up with growth in these non-reserve liabilities," Earl wrote in an Oct. 14 report. The Treasury's bill-issuance bonanza "calls for an ever-larger TGA balance. This means the Fed should likely be considering the TGA closer to $950 billion as an upside risk into year end."
Related story: Powell Says Fed May Stop Shrinking Balance Sheet in Months Ahead
The Treasury Department has increased the size of its weekly bill auctions at a pace that suggests that the net supply of bills will be about $146 billion this month, $80 billion more than anticipated, according to Bank of America Corp.
A bigger supply of bills requires a higher TGA balance in order to keep pace with the cash flows. The Treasury Department's policy — reiterated by acting Assistant Secretary for Financial Markets Hunter McMaster at the New York Fed's annual primary dealer meeting last month — is to run the TGA at a level sufficient to cover expenses plus the gross volume of maturing marketable debt for a week.
After holding steady at $850 billion for much of the past year, the Treasury's official quarter-end targets for the TGA "might be revised up to $900 billion in the new quarterly borrowing projections that will be released on November 3, and we think there is a high probability that it will move up to that level in the first half of next year," Wrightson ICAP senior economist Lou Crandall wrote on Oct. 14.
(Corrects headline of story published Oct. 15 to remove reference to shrinking balance sheet)
More stories like this are available on bloomberg.com
