Recalibrate Treasury General
Account Management

Category B: Non-Reserve Liabilities

Options 14 and 15 are fundamentally different from Options 01–13. The prior options all targeted reserve demand — the amount of reserves the banking system wants to hold for regulatory, operational, or precautionary reasons. Options 14–15 target non-reserve liabilities on the Fed's balance sheet: the TGA (held by the Treasury) and the foreign reverse repo pool (held by foreign central banks and SWFs).

Reducing non-reserve liabilities shrinks the Fed's balance sheet directly, without any change in the stock of bank reserves. This is the "liability side" approach to balance sheet reduction: rather than draining reserves from the banking system (which requires QT and raises questions about reserve adequacy), it reduces other components of the Fed's liabilities that do not serve a monetary policy function.

The TGA as a Fed Liability

The TGA is a demand deposit held by the U.S. Treasury at the Federal Reserve. Like any deposit, it appears on the Fed's balance sheet as a liability — matched by the Fed's asset portfolio of Treasuries and MBS. A larger TGA means a larger Fed balance sheet, all else equal.

Since 2015, the Treasury has deliberately maintained a larger TGA balance as a precautionary buffer against debt-limit disruptions and to reduce its reliance on emergency cash management tools. The TGA averaged $200–500 billion in normal periods between 2015–2024, compared to roughly $5–10 billion in the pre-2008 era when Treasury managed its cash balance much more tightly.

The Policy Option: Reducing the TGA Operational Buffer

Treasury currently targets a TGA buffer of approximately five business days of expected operating expenses as a precautionary liquidity buffer. The paper proposes reducing this target to two to three business days, which would mechanically reduce the TGA balance by roughly $200–400 billion and correspondingly reduce the Fed's balance sheet by the same amount — without any change in bank reserves.

The freed-up TGA balances would be replaced by more active short-term cash management — specifically, more active use of Treasury's Supplementary Financing Program (SFP) and Commercial Paper facilities, or a modernised TT&L-type arrangement where Treasury cash is held at commercial banks under deposit agreements rather than at the Fed.

Why This Reduces the Fed's Balance Sheet Without Affecting Reserves

When Treasury shifts cash from the TGA to commercial bank accounts, the mechanics are: (1) TGA falls by $X at the Fed — Fed liability decreases; (2) the commercial bank receives a deposit from Treasury — commercial bank liability increases; (3) the commercial bank simultaneously gains $X in reserves at the Fed, because the payment from the TGA to the commercial bank flows through the Fedwire system and credits the bank's reserve account.

Wait — doesn't this increase reserves? In a static sense, yes. But the point is that the next time Treasury needs cash, instead of drawing down the TGA (which would destroy reserves), Treasury draws down its commercial bank deposit — which reduces commercial bank liabilities without affecting reserves. Over a Treasury operating cycle, the net effect on reserves is zero; the Fed's balance sheet is smaller because the TGA is smaller.

Treasury's Perspective

Treasury's primary concern with a smaller TGA buffer is that it reduces resilience to debt-limit episodes. During a debt-limit standoff, Treasury cannot issue new debt and must rely on its cash balance and extraordinary measures to fund government operations. A smaller buffer leaves less margin for error. Treasury would need to weigh the Fed's balance sheet reduction objectives against its own fiscal risk management mandate.

The paper argues this trade-off is acceptable given the availability of other extraordinary measures and the benefits of balance sheet normalisation, but acknowledges the decision rests ultimately with Treasury, not the Fed.