LONDON, Feb 23 Reuters The U.S. Treasury is due to run down a 1.6 trillion bank account at the Federal Reserve as government spending ramps up in the months ahead a move some analysts warn may crush shortterm money rates further and flood financial markets with cash.
The Treasury said recently it would halve its extraordinarily large balance at the socalled Treasury General Account TGA by April and cut it to 500 billion by the end of June.
Heres whats involved and its potential fallout
1WHAT IS THE TGA AND HOW DOES IT WORK?
The U.S. government runs most of its daytoday business through the TGA managed by the New York Fed and into which flow tax receipts and proceeds from the sale of Treasury debt.
When citizens or businesses receives a government cheque, they deposit it at their commercial bank, which presents it to the Fed. The Fed then debits the Treasurys account and credits the banks account at the Fed increasing its reserve balance.
The TGA sits on the Feds balance sheet as a liability, along with notes, coins and bank reserves.
But the Feds liabilities must match its assets. So a drop in the TGA must see a rise in bank reserves and vice versa. Last years reserves drain was masked by the Feds 3 trillion in asset purchases.
But when cash flows leaves the TGA, bank reserves rise potentially increasing lending or investment in the wider economy or markets.
Thats why the government usually keeps TGA balances low. Todays balance is more than four times year…