The Treasury General Account, the TT&L Program, and the Foreign Repo Pool

BPI just posted a note on how volatility of two liabilities of the Fed—The Treasury General Account and the Foreign Repo Pool–contributed to the FOMC’s recent decision to continue using a large-balance-approach to implementing monetary policy. https://bpi.com/two-little-noticed-and-self-inflicted-causes-of-the-feds-current-monetary-policy-implementation-predicament/

Changes in the TGA and the Foreign Repo Pool cause one-for-one shifts in bank deposits at the Fed (a/k/a “reserve balances” or “reserves”) unless the Fed engages in offsetting changes in the size of its balance sheet.  Pre-crisis, the Fed offset such volatility in reserves by varying the size of its book of repurchase agreements.  Given the volatility of those two liability items, the Fed concluded that conducting policy in the pre-crisis manner would require repo operations that were undesirably large and frequent.

Implementing monetary policy with a large-balance-sheet approach was one way to adjust monetary policy for increased volatility in those accounts.  But, as described in the post, another would have been, and still would be, simply to reduce that volatility.  The latter approach would have helped alleviate the turmoil witnessed in repo markets two weeks ago.

I will copy the post below.  BPI has now posted five posts on the repo market turmoil.  In addition to today’s post:

On September 24, we posted a note that discusses the implications for the Fed’s monetary policy implementation framework. https://bpi.com/fed-at-a-crossroad/

On September 26, we posted a note that discusses the role of bank regulations in the turmoil in money markets. https://bpi.com/bank-regulations-and-turmoil-in-repo-markets/

On September 18, we posted a note that explains the events and their implications. https://bpi.com/what-just-happened-in-money-markets-and-why-it-matters/

And on September 3, we posted a note that indicated the turmoil was coming and suggested a way the Fed could delay it. https://bpi.com/impending-money-market-volatility-prompts-warning-light-for-lcr-tune-up/

Comments and questions welcome.  Please feel free to share.  I will not be hurt if you send me a gentle “unsubscribe.”

Bill

Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.