The graph above shows the operational account that the U.S. Department of the Treasury has with the Federal Reserve. This account is basically equivalent to the checking accounts individuals and businesses have with their banks. Indeed, the Federal Reserve acts as the U.S. government’s bank. And this account has plenty of funds to take care of expected cash payments, check clearing, and outstanding wires. In general, though, it’s a good idea to prevent an account balance from getting too large. The balance could be used to reduce debt or be spent on goods and services instead of earning very little interest. Yet, this account has had substantial balances since 2008, and they keep getting larger. Why?

The answer has to do with the Treasury’s response to the financial crisis of 2008. The Treasury assisted the Fed with the Supplementary Financing Program (SFP). In September 2008, the Treasury began issuing short-term debt and placing the proceeds at the Fed. This helped offset the large balances that other banks were holding at the Fed. The SFP has been empty since July 2011; yet, there are still large cash holdings to this date. There are two reasons for this: First, late in 2008 the Treasury suspended its cash reinvestment program. It used to make short-term loans to banks that needed liquidity. Given low interest rates and the fact that banks have been holding excess reserves, this program hasn’t been necessary, and so the Treasury is holding more cash. Second, since late 2015 the Treasury has been purposefully holding more cash to be prepared for any major disruptions, such as a potential cyber event or a systemic event like the crisis in 2008.

How this graph was created: Search FRED for “Deposits with Federal Reserve” and add the series to the graph.

Suggested by Glen Owens and Christian Zimmermann.