Skip to content
How the Fed finances US debt


Last week’s deal in Congress to raise the debt ceiling until early December could offer a few more weeks of partisan wrangling, but it won’t solve deeper problems with government funding. Such is the deplorable state of day-to-day US finances as White House officials have issued apocalyptic warnings of impending financial collapse, as well as sacred invocations to preserve full faith and credit for US Treasury debt. .

The White House Council of Economic Advisers, headed by Cecilia Rouse, said: “If the United States were to default, tens of millions – including families with children, retirees and veterans – would quickly, even overnight in some cases, faced with the prospect of losing regular federal payments that help them make ends meet. Defense Secretary Lloyd Austin said, “If the United States defaults, it would undermine the economic strength upon which our national security is built. “

With so much at stake, it’s no wonder the White House is seriously considering a plan whereby the Treasury minted a $ 1,000 billion platinum coin, deposited it with the Federal Reserve, and then continued to pay the bills like usually.

But Treasury Secretary Janet Yellen rejected the idea. “It really is a gadget,” she said. The platinum coin “is tantamount to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt.” This compromises the independence of the Fed, confusing monetary policy with fiscal policy. “

This concern with mixing the central bank and the budget was ironic, given the cross-pollination that already exists. In the past two years alone, the Fed has acquired more than $ 3.3 trillion in treasury debt, which is equivalent to more than half of the combined federal budget deficits for 2020 and 2021.

In addition, the Fed takes interest payments received on its portfolio holdings of Treasury securities and other US government-backed securities and sends most of that income as revenue to the Treasury. The Fed’s “remittances” to the Treasury totaled $ 87 billion in 2020, or about 85% of the Fed’s $ 102 billion in annual interest income. Remittances to the Treasury are even higher this year, according to the Fed’s June 2021 quarterly report, and will likely exceed $ 100 billion. How’s that for a gadget?

These numbers are important in the debate over the possibility that the US government will default. Consider that $ 6.3 trillion of the $ 28.4 trillion in total public debt is Treasury debt issued on federal trust funds and other public accounts. Interest paid on these securities is treated as an “intragovernment” transaction that has no effect on the budget deficit. Both payments and receipts are recorded under the same expenditure category of the federal budget.

It is the cost of financing the remaining $ 22.1 trillion in publicly held federal debt – of which the Federal Reserve holds $ 5.4 trillion – that influences the size of the federal budget deficit. Since the Congressional Budget Office estimates net interest expense at $ 413 billion this year, the remittances transferred to the Treasury by the Fed have a significant effect, capable of offsetting government interest charges (i.e. that is, its net interest expense) of approximately 25% or Continued.

In short, with the Fed holding about a quarter of the publicly held federal debt on which the Treasury must pay interest – and with the Fed’s practice of sending weekly remittances to the Treasury – it is clear that monetary and fiscal policies are confused.

There is an additional complication: If the Federal Reserve increases the interest rate it pays on the $ 4.1 trillion in reserve balances held by commercial banks and other savings institutions in the deposit accounts of With the Fed above its current level of 0.15%, additional interest charges (including interest paid to foreign banks) would be deducted from the Fed’s remittances to the Treasury.

So that sounds a bit hollow for Ms. Yellen to sing about the dangers of compromising the independence of the Fed. And it also seems misleading to confuse the requirement to make interest and principal payments on US government debt with a broader notion of “paying America’s bills.”

During the 2011 budget stalemate, Federal Reserve and Treasury officials privately crafted a plan to make on-time payments on Treasury debt and delay paying other government bills if the Obama administration and Congress failed to raise the debt ceiling. Fed transcripts show that the central bank, acting as the Treasury’s fiscal agent, was prepared to prioritize principal and coupon payments, withholding other government payments if necessary. Ms. Yellen was the vice president of the Fed at the time.

Even as Democrats attempt to frame prioritization as tantamount to defaulting on Treasury debt, Republicans have introduced legislation (the Full Faith and Credit Act) that would require certain payments – for debt service, military pay, social security, medicare and veterans benefits – to take precedence over all other obligations. “Washington’s reckless spending is completely out of hand,” said Sen. Rick Scott (R., Fla.), Who is leading the effort. “Too many people in Washington have accepted deficit spending, blank checks, tax hikes and skyrocketing inflation as the status quo.”

Before the debt crisis hits its next crescendo, it’s worth examining the questionable financial arrangements and accounting principles that are fueling confusion and hysteria as the Treasury hits the federal borrowing limit .

Ms. Shelton, an economist, is a senior researcher at the Independent Institute and author of “Money Meltdown”.

Copyright © 2021 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8