The Fed May Need to Head Off a Money-Market Mess

Investors are worried that a flood of cash could soon disrupt U.S. money markets, as the Treasury rushes to rid itself of money that Congress won’t allow it to keep. It’s a possibility that the Federal Reserve would do well to anticipate.

Two phenomena have converged to create the impending deluge. For one, to ensure the funds needed to deliver trillions of dollars in pandemic relief, the Treasury has built up a huge cash balance at the Fed — currently about $1.6 trillion. Also, back in August 2019, Congress suspended the federal debt ceiling for two years — and has stipulated that when the ceiling comes back into effect on August 1, Treasury should be holding no more than about $120 billion in cash. This constraint was intended to prevent Treasury from preparing for the debt limit by accumulating an extraordinarily large cash balance.