The Relationship Between the Treasury and The Fed

The Treasury is part of the executive branch of the US government. As such, they must follow the direction of the President of the United States. The Federal Reserve is independent of the executive branch, almost like the Supreme Court.  The voting members of the controlling body of the Fed are nominated by the President and approved to 14 year terms. The goal is to limit the impact of short-term politics on decisions about the money supply. Specifically, there is a concern is that if  the Federal Reserve was not independent, politicians would seek to obtain short-term economic growth through expanding the money supply, at the cost of long-term inflation.

 

What are the responsibilities of the Federal Reserve?

The Federal Reserve is often talked about as the Government’s and The Banker’s Bank.  Its responsibilities include:

  • Controlling the supply of money in the US economy, and through monetary policy aims to obtain full employment and stable prices.  This is the responsibility that you will hear the most about and you can learn more about in our full article on the Fed.
  • Acting as the “Banker’s Bank”.  Through the 12 district Federal Reserve banks and their 25 branches the Federal Reserve System is responsible for the nation’s payments system and acts as the lender of last resort for member banks.
  • Acting as the “government’s bank”, selling Treasury securities, running the treasury auction process on behalf of the Treasury Department, and investing money raised through auctions and tax collection until it is needed by the government.
  • Acting as a regulator overseeing and supervising the banking system.  This is a responsibility which, depending on the type of bank, the Fed shares with the US Treasury and other Government regulators such as the SEC.

Once the expenses of the Fed are paid any remaining money is paid to the US Treasury.  The Federal Reserve is actually very profitable as it receives interest on the trillions of dollars in treasuries and other types of bonds it holds in its portfolio.

 

What are the responsibilities of the US Treasury?

The US Treasury is similar to the finance and accounting department at a public company.  It is responsible for managing the government’s finances.  Its responsibilities include:

  • Raising revenues for the government by collecting taxes.  (The IRS is part of the US Treasury).
  • Enforcing finance and tax laws by investigating and prosecuting tax evaders.
  • Paying the bills of the government
  • Managing the Government’s Debt
  • Printing of money and coinage.  (The Fed is responsible for the money supply, the Treasury is responsible for the production of the actual bills and coins).
  • Advising the government on international financial, monetary, economic, trade and tax policy
  • Regulating and ensuring the stability of the banking system

How do the responsibilities of The Fed and the US Treasury Overlap?

As you can see from the above the responsibilities of the Fed and the Treasury overlap in many areas.  Both have the responsibility of supervision of the banking system and maintaining the stability of the financial system as a whole.  They are at the center of the US Economy with the US Treasury responsible for the day to day financial activities of the US Government, and the Fed responsible for the overall smooth functioning of the economy as a whole.

Have a question about the treasury or the Fed the we didn’t answer?  Leave a comment below and we will be happy to respond.

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Comments

  1. Richard Fairbanks says

    When the Federal Reserve creates the equivalent of money out of thin air, does that money become a debt of the U.S. Treasury? How does that debt relate to the debt that comes from selling Treasury bonds? Are there really two components to government debt, the Treasury bonds etc, and the debt created “ex nihilo” when the Federal Reserve “adds to their balance sheet” the money created out of thin air? Apparently the debt ceiling does not restrict the Federal Reserve, but does limit the government in some way. Is that via the ability to issue Treasury bonds, etc.? Am I correct that fiat money is coming fromthe Federal Reserve with no control by the governement?

    • David Waring says

      Hi Richard,

      Thanks for the comment these are good questions.

      If I am understanding correctly there is some confusion over the difference between debt and printing money. There are not two components to the debt. In order for the country’s debt level to increase, the treasury has to issue that new debt in the form of treasury bills, notes and bonds. When the fed prints money this does not add to the country’s debt. All else being equal it makes the value of existing currency weaken but this is not new debt. You are correct that the debt ceiling does not restrict the federal reserve from printing new money. It does however restrict the treasury from issuing new debt. Only the treasury can issue treasuries and the fed does have the ability to print money without permission from the government. The government does have some control as they elect the members of the Fed but that’s it. So again I think the confusion is that printing money and issuing debt are two separate things. Hope that helps.

      Best Regards,
      Dave

  2. rob says

    Is the Fed is quasi-private, and if so, does that mean that private bankers have some measure of control over the decisions of the seven President appointed directors, and do those private bankers derive profits from the interest paid by Treasury on the bonds that the Fed purchases?

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