The Treasury said recently it would halve its extraordinarily large balance at the so-called Treasury General Account (TGA) by April and cut it to $500 billion by the end of June. 1/WHAT IS THE TGA AND HOW DOES IT WORK? The U.S. government runs most of its day-to-day business through the TGA - managed by the New York Fed and into which flow tax receipts and proceeds from the sale of Treasury debt. When citizens or businesses receives a government cheque, they deposit it at their commercial bank, which presents it to the Fed. The Fed then debits the Treasury’s account and credits the bank’s account at the Fed - increasing its reserve balance. The TGA sits on the Fed’s balance sheet as a liability, along with notes, coins and bank reserves. But the Fed’s liabilities must match its assets. So a drop in the TGA must see a rise in bank reserves and vice versa. Last year’s reserves drain was masked by the Fed’s $3 trillion in asset purchases. But when cash flows leaves the TGA, bank reserves rise - potentially increasing lending or investment in the wider economy or markets. ADVERTISEMENT That’s why the government usually keeps TGA balances low. Today’s balance is more than four times year ago-levels. In the past four years, it has rarely surpassed $400 billion and prior to 2016, it never exceeded $251 billion. Graphic: Fed assets and liabilities - Reuters Graphic 2/WHY ARE WE TALKING ABOUT TGA NOW? The TGA balance soared in 2020 because the Treasury ramped up borrowing to pay for an expected $1 trillion-plus in pandemic relief. But as stimulus was approved only in December, the accumulated monies were not all spent. This year, it plans to run down the balance, slashing first-quarter borrowing plans to a quarter of initial estimates. That may send what Credit Suisse dubbed a “tsunami” of cash into depositary bank reserves. What’s more, less Treasury borrowing is seen impacting its main funding avenue of recent years - T-bills and cash management bills, cash-like securities banks use as collateral for repo borrowing and hedging derivative trades. “Fewer bills mean more cash looking for a home in liquidity land,” JPMorgan said, adding: “U.S. money market and short term debt market participants are knee deep in liquidity.”