Set the limit on the U.S. Treasury Department's (TGA) account? Will Powell "shrink the balance sheet" like this?

Federal Reserve Chair Nominee Waller advocates for a “balance sheet reduction” plan, a long-overlooked mechanism discussion heating up again—limiting the size of the Treasury General Account (TGA). While theoretically feasible, the Treasury may not permit it.

According to Chase Trade Desk, U.S. Bank Securities Rate Strategist Katie Craig breaks down this logic chain: Setting a cap on TGA, with excess cash flowing into the banking system as reserves, and once reserves are ample enough, the Fed could restart quantitative tightening (QT), selling assets and reclaiming reserves, ultimately shrinking the balance sheet.

The logic on the books is sound, but her judgment is clear—this plan is “highly unlikely” to be implemented. The Fed and Treasury have not engaged in any official communication regarding this approach, and the Treasury fundamentally does not want a smaller TGA. Since the beginning of this year, the Treasury’s rolling five-day cash outflows average about $825 billion, and tend to be higher during large debt payments or tax refund seasons.

It’s worth noting that TT&L (Treasury Tax & Loan) is not a new concept—before the financial crisis, the Fed managed this mechanism on behalf of the Treasury. After the crisis, as reserves shifted from scarcity to abundance, TT&L gradually phased out. Canada and the UK still have similar arrangements, but replicating this in the U.S. faces significant obstacles.

TGA—A Major Variable on the Fed’s Liability Side

The Fed’s main liabilities consist of three parts: (1) currency in circulation; (2) the Treasury General Account (TGA); (3) bank reserve balances.

Bank of America points out that TGA appears as a liability on the Fed’s balance sheet: when the Treasury deposits money, the liability increases; when it spends, the liability decreases. TGA is one of the largest liabilities on the Fed’s balance sheet and is largely outside the Fed’s control. The Treasury’s minimum cash target is the sum of expected expenditures over the next five days, averaging about $825 billion year-to-date, and it tends to spike during large debt repayments or tax refund seasons.

There is a precedent for the Fed controlling TGA: before the 2008 global financial crisis, the Fed managed the Treasury’s Tax & Loan (TT&L) operations on behalf of the Treasury. Instead of immediately depositing tax revenues into TGA, commercial banks were allowed to hold onto the funds temporarily, smoothing inflows and reducing the passive outflow of reserves that could impact the money market.

At that time, two “incentive” features were in place: the Treasury earned interest on TT&L deposits, whereas TGA deposits paid zero interest; additionally, funds could be used more flexibly—invested in term deposits or repurchased government securities.

As the Fed entered an era of abundant reserves, TT&L operations gradually diminished, and the Fed deemed their necessity greatly reduced.

Modern Proposal: Limit TGA Cap or Restart TT&L

If today’s approach involves “setting a cap on TGA/restarting TT&L,” the Bank of America Merrill Lynch research team explores a two-stage transmission mechanism:

Stage A: TGA funds transfer into commercial banks as TT&L-like deposits

• Fed balance sheet: TGA decreases by 100, reserves increase by 100, total size unchanged

• Commercial banks: reserves increase by 100, Treasury deposits increase by 100

Stage B: The Fed restarts QT, shrinking the balance sheet

• Fed: Treasury securities decrease by 100, reserve liabilities decrease by 100, total size shrinks

• Banks: reserves decrease by 100, securities increase by 100, net change zero

Through these two steps, the Fed’s balance sheet can be substantially reduced, while total bank reserves remain unchanged. The net interest impact on the Treasury roughly offsets—interest paid on debt is approximately equal to interest earned on deposits.

Three Major Obstacles

Despite the logical consistency of the mechanism, Bank of America Merrill Lynch is highly skeptical about its practical implementation, citing three core obstacles:

2. Treasury unwilling to shrink TGA: TGA is not just a savings account; it also needs to handle large single-day payments. A low balance could pose liquidity risks.

3. Banks may resist: The timing of Treasury deposits and withdrawals is unpredictable and less stable than retail deposits, making liquidity management more passive.

4. Extreme volatility during debt ceiling crises: Each time the debt ceiling is reached, TT&L-like accounts experience sharp disruptions, greatly increasing management difficulty.

These combined obstacles largely dissuade the Treasury from actively pursuing this plan. The Fed and Treasury have never officially discussed plans to limit TGA or restart TT&L.

Canada and the UK’s Approaches, Not Easily Replicated in the U.S.

Bank of America Merrill Lynch compares the U.S. discussion with two overseas cases:

Canada (Bank of Canada’s RG auction mechanism):

The Bank of Canada conducts daily auctions of the “Revenue General Account” (RG) on behalf of the federal government, offering government deposits to banks in overnight or short-term formats, earning interest—projected to generate about CAD 223 million in interest income in 2026.

The auction demand is highly correlated with the banking system’s settlement balances. When liquidity tightens and repo rates deviate significantly from the target, the Bank of Canada also conducts additional overnight and term repo operations.

UK (Debt Management Office’s proactive cash management):

The UK’s arrangement is more comprehensive: the Debt Management Office (DMO), not the Bank of England, manages the Consolidated Fund account. DMO daily conducts bilateral repos or deposit operations to offset fiscal flows, keeping reserves relatively stable, allowing the Bank of England to focus on interest rate management without fiscal account fluctuations.

However, this framework has a side effect—it requires more temporary government bond issuance to absorb or inject liquidity. The U.S. Treasury’s consistent stance is to maintain a “predictable, regular” bond issuance schedule, which conflicts with this approach.

Even if implemented, the effects would be temporary

If TGA caps are set or TT&L is restarted, initial effects would be a loosening of dollar funding conditions: cash flows from TGA into bank reserves, then into the money market, putting downward pressure on short-term rates. But this easing window would not last—once the Fed restarts QT or accelerates balance sheet reduction, excess reserves would be drained, and funding conditions would revert.

Bank of America’s view is that: from an interest income perspective, the Treasury’s earnings on TT&L deposits roughly offset the debt service costs, making it nearly neutral; but operationally, especially during debt ceiling negotiations, the volatility of TT&L balances could become a new source of instability.

Therefore, Bank of America believes that limiting TGA or restarting TT&L could, in theory, marginally shrink the Fed’s balance sheet, but this pathway is unlikely to be realized.

This insightful content is from Chase Trade Desk.

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