Federal Reserve and the Treasury Joint Statement

March 24th, 2009 12:37 am | by John Jansen |

The Federal Reserve and the Treasury issued a joint statement at 430PM New York time about the role of the Federal Reserve in the ongoing credit crisis.

I am surprised that I have not seen any comments on this. JPMorgan economists entitled their email “The 2009 Treasury-Fed Accord” which is a reference to the historic 1951 Accord between the Fed and Treasury which established the independence of the Fed. Here are the thoughts of JPMorgan on this Accord:

At 4:30 this afternoon the Fed and Treasury put out a joint press release spelling out some general principles regarding the Fed’s role in financial and monetary policy.  While the release did not announce any immediate policy action, it did point toward three shifts in the conduct of policy: (i) Treasury and Fed will likely ask Congress to give the Fed authority to issue bills (ii) the release gave the Fed a leg up in the contest to become the financial ‘super-regulator’ and (iii) the Treasury and Fed agreed in principle to Plosser’s proposal for the Treasury to take some of the risk off the Fed balance sheet.

With regard to Fed bill issuance, the statement discussed the Treasury’s Supplementary Financing Program (SFP) and then went on to state “In addition, the Treasury and the Federal Reserve are seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves.”  This most likely refers to giving the Fed the authority to issue bills to fund the expansion of its balance sheet.  By the wording of the statement, the other major option, exempting the SFP from the debt ceiling, seems to have fallen out of the running as an alternative reserve management tool.  Fed bill issuance would require Congressional approval.  Although Congress has been distracted from more constructive measures lately, it seems unlikely that the two institutions would have gone public with this if they didn’t sense some support for the idea.  As we discussed in a recent research note (attached below), issuing bills not only helps for the exit from QE, but also relieves the banking system of some of the burden of the looming massive increase in excess reserves.

The press release also gave the Treasury’s implicit blessing for the Fed to play an important role in whatever regulatory regime emerges from the crisis.  For example, the release noted “The Federal Reserve’s expertise and powers are indispensable for preventing and managing financial crises.”  Several other references in the release strike a similar tone.  Like the turf war fought in 1999, the early skirmishes of the current episode are looking favorable for the Fed.

Finally, the release suggested that the Fed and Treasury agree in principle to the idea put forth by Philly Fed President Plosser in February that the Treasury should take some of the risk off the Fed balance sheet.  Plosser suggested that the Fed and Treasury engage in a swap whereby the Fed gives Treasury its risky assets and the Treasury give the Fed Treasury securities.  Today’s statement went part way toward endorsing this approach when it noted “In the longer term and as its authorities permit, the Treasury will seek to remove from the Federal Reserve’s balance sheet, or to liquidate, the so-called Maiden Lane facilities.”  Recall that Maiden Lane I, II, and III include not only Bear Stearns but also AIG assets and sum to $72 billion in net portfolio holdings.


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  1. 7 Responses to “Federal Reserve and the Treasury Joint Statement”

  2. By GreenAB on Mar 24, 2009 | Reply

    the fed as a superregulator?

    as far as i know, the regional feds are owned by private banks.

    am i the only one who sees a massive conflict of interest there making the whole thing unworkable?

  3. By Matt on Mar 24, 2009 | Reply

    QE refers to “quarter end” or something else?

  4. By John Jansen on Mar 24, 2009 | Reply


    In this context Quantitative Ease.

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