Treasury To Shrink Debt Program With Fed

The Treasury said today that it will vastly shrink a program it created during the height of the financial crisis to provide the Federal Reserve with additional liquidity. The program used short-term Treasury debt to create a funding cushion for the Fed. It's curbing the program for two reasons: because the economy is strengthening so the program is less necessary and to slow the inevitable approach to the $12.1 trillion debt ceiling in place. So what effect will this have?

Bloomberg explains one consequences.

The Treasury's move means the amount of Treasury bills available will shrink over the next six weeks by nearly 10 percent, said Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey. This will push rates down because of the high demand for bills, and it may have a similar effect on the federal funds rate, he said.

"The net result should be tighter bills supplies and a looser reserves market, giving rates even more of a downward bias in both sectors," Crandall said.

It should also be noted that the program will not disappear altogether. At one point, the fund was up to $560 billion, and currently weighs in at around $200 billion. The Treasury is only keeping around $15 billion intact so that the Fed can ramp it up again in a future crisis, if necessary. Allowing the program to stay alive will likely provide ammunition for those who believe that the Federal Reserve and Treasury have become too cozy in recent years. The Fed, however, argues that toning the program down shows that it is strengthening its independence. In any case, toning down the program seems at least a step in the right direction.