As fiscal agents of the
One of the unique fiscal agency functions that the Reserve Banks
provide to the Treasury is a program through which the Reserve Banks invest
Treasury monies until needed to fund the government’s operations. The Treasury
receives funds from two principal sources: tax receipts and borrowings. The
funds that flow into and out of the government’s account vary in amount
throughout the year; for example, the account balance tends to be relatively
high during the April tax season. The Treasury directs the Reserve Banks to
invest funds in excess of a previously agreed-upon minimum amount in special
collateralized accounts at depository institutions nationwide. The Federal
Reserve monitors these balances for compliance with collateral requirements and
returns the funds to the Treasury when they are needed.
This investment facility, in which excess funds are invested in
accounts at depository institutions, also facilitates the implementation of
monetary policy. When funds flow from depository institutions into the
Treasury’s account at the Federal Reserve, the supply of Federal Reserve
balances to depository institutions decreases. The reverse occurs when funds flow from the Treasury’s Federal Reserve account to the Treasury’s accounts at
depository institutions. A stable balance in the Treasury’s account at the
Federal Reserve mitigates the effect of Treasury’s receipts and disbursements
on the supply of Federal Reserve balances to depository institutions.
The Reserve Banks make disbursements from the government’s account
through Fedwire funds transfers or ACH payments, or to a limited extent, by
check. Fedwire disbursements are typically associated with, but not limited to,
the redemption of Treasury securities. Certain recurring transactions, such as
Social Security benefit payments and government employee salary payments, are
processed mainly by the ACH and electronically deposited directly to the
recipients’ accounts at their depository institutions. Other government payments
may be made using Treasury checks drawn on the government’s account at the
Reserve Banks. The Treasury continues to work to move the remaining government
payments away from Treasury checks toward electronic payments, primarily the
ACH, in an effort to improve efficiency and reduce the costs associated with
government payments.
The Federal Reserve plays an important role when the Treasury needs to
raise money to finance the government or to refinance maturing Treasury
securities. The Reserve Banks handle weekly, monthly, and quarterly auctions of
Treasury securities, accepting bids, communicating them to the Treasury, issuing
the securities in book-entry form to the winning bidders, and collecting payment
for the securities. Over the past several years, the auction process has become
increasingly automated, which further ensures a smooth borrowing process. For
example, automation has reduced to only minutes the time between the close of
bidding and the announcement of the results of a Treasury securities auction.
Treasury securities are maintained in book entry form in either the
Reserve Banks’ Fedwire Securities Service or the Treasury’s TreasuryDirect
system, which is also operated by the Reserve Banks. Even though TreasuryDirect
holds less than 2 percent of all outstanding Treasury securities, it provides a
convenient way for individuals to hold their securities directly, rather than
with a third party such as a depository institution. Individuals purchase
Treasury securities either directly from the Treasury when they are issued or on
the secondary market, and they instruct their broker that the securities be
delivered to their TreasuryDirect account. Once the securities are deposited
there, the ACH directly deposits any interest or principal payments owed to the
account holder to the account holder’s account at a depository institution. A
Reserve Bank, if requested, will sell securities held in TreasuryDirect for a
fee on the secondary market, even though this is a service intended for
individuals who hold Treasury securities to maturity.
The Federal Reserve also provides support for the Treasury’s savings
bonds program. Although savings bonds represent less than 5 percent of the
federal debt, they are a means for individuals to invest in government
securities with a small initial investment, currently $25. The Reserve Banks
issue, service, and redeem tens of millions of