Fed plumbing: Treasury's cash account, not QT, is now moving reserves

The Federal Reserve's weekly balance sheet has gone quiet. Total assets were $6,755.6 billion on Wednesday, Oct. 14, up $8.1 billion from a week earlier and only about $9 billion above the Sept. 16 reading of $6,746.5 billion, according to H.4.1 data on FRED. Over five weeks the Fed's footprint has barely moved.

Bank reserves have not been nearly as calm. Reserve balances averaged $3,022.1 billion in the week ended Oct. 14, down $7.5 billion on the week. But they had averaged $2,930.2 billion in the week ended Sept. 23 and $3,013.8 billion in the week ended Sept. 16, a swing of more than $80 billion in each direction within a month.

Treasury's account is the swing factor

The mirror image sits in the Treasury General Account, the government's checking account at the Fed. It averaged $877.0 billion in the week ended Sept. 16, jumped to $977.1 billion in the week ended Sept. 23, and has since fallen back to $883.4 billion. The $93.7 billion decline since late September lines up closely with the $91.9 billion rise in reserves over the same span. The September spike coincided with the mid-month corporate tax date, when receipts flow into Treasury's account and drain cash from the banking system.

In earlier years, money-market funds could absorb such swings by moving cash in and out of the Fed's overnight reverse repo facility. That buffer is effectively gone: usage was $1.201 billion on Oct. 15 and $0.201 billion on Oct. 14. Every dollar Treasury now pulls into its account comes out of reserves, and every dollar it spends goes back in.

No strain yet in funding rates

So far the money markets are taking this in stride. The Secured Overnight Financing Rate was 3.88% on Oct. 14, 2 basis points below the 3.90% interest rate on reserve balances. Repo trading at or above the reserve rate has historically been the signal that reserves are getting scarce; that signal is not flashing today.

The AlphaGen read

Reserves near $3 trillion look ample for now, but the system has lost its shock absorber. That makes Treasury's cash-management choices, including how much it holds in the TGA around tax dates, quarter-ends and heavy bill settlements, the main source of week-to-week liquidity volatility. The spread between SOFR and the reserve rate is the simplest gauge to watch: if repo starts printing above 3.90% around the next tax or settlement date, the debate over whether reserves are still ample will return quickly.