Federal Reserve Gifts to Treasury Cut Borrowing Needs

The U.S. Treasury doesn’t need to borrow as much money in the second quarter as it had previously forecast.

The government will borrower about $30 billion this quarter, much less than the original estimate of $83 billion. The change is due to the Fed ending its balance sheet operations.

As the Fed reduces the amount of bonds it owns, it receives less interest, and in turn remits lower payments to the Treasury.  Under its own regulations, the Fed must give the Treasury any excess cash it holds.  In recent years, the Fed has generated between $75 billion and $100 billion in excess funds that are handed over the U.S. government’s general fund.

Treasury said it expects to borrow $160 billion during the July-September quarter. It borrowed $374 billion through credit markets in the January-March quarter, ending the period with $334 billion in cash.

It expects to end the April-June quarter with $270 billion in cash.

The added gift from the Fed should continue for years to come because when the central bank stops letting bonds roll off in September it will still own roughly $3.5 trillion worth of U.S. Treasuries and mortgage-backed securities.   All of the interest earned on the bonds not used for normal Fed operations are required to be sent to the Treasury.

If you’ve ever wondered what happened to all the money that flows to the Fed, you can rest easy knowing it’s in the capable hands of Congress, which can incur larger deficits because of the added cash.

The added income should keep the U.S. government’s borrowing below $1 trillion at least for FY2019, and might keep the deficit under that level in FY2020.

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