As fiscal agents of the United States, the Federal Reserve Banks function as the U.S. government’s bank and perform a variety of services for the Treasury, other government agencies, government-sponsored enterprises, and some international organizations.  Often the fiscal agent services performed by the Reserve Banks are the same, or similar to, services that the Reserve Banks provide to the banking system.  Services performed for the Treasury include maintaining the Treasury’s bank account; processing payments; and issuing, safekeeping, and transferring securities.  Fiscal services performed for other entities are generally securities-related.  The Treasury and other entities reimburse the Reserve Banks for the expenses incurred in providing these services.

One of the unique fiscal agency functions that the Reserve Banks provide to the Treasury is a program through which the Reserve Banks invest Treasury monies until needed to fund the government’s operations.  The Treasury receives funds from two principal sources: tax receipts and borrowings.  The funds that flow into and out of the government’s account vary in amount throughout the year; for example, the account balance tends to be relatively high during the April tax season.  The Treasury directs the Reserve Banks to invest funds in excess of a previously agreed-upon minimum amount in special collateralized accounts at banks and depository institutions nationwide.  The Federal Reserve monitors these balances for compliance with collateral requirements and returns the funds to the Treasury when they are needed.

This investment facility, in which excess funds are invested in accounts at depository institutions, also facilitates the implementation of monetary policy.  When funds flow from depository institutions into the Treasury’s account at the Federal Reserve, the supply of Federal Reserve balances to depository institutions decreases.  The reverse occurs when funds flow from the Treasury’s Federal Reserve account to the Treasury’s accounts at depository institutions.  A stable balance in the Treasury’s account at the Federal Reserve mitigates the effect of Treasury’s receipts and disbursements on the supply of Federal Reserve balances to depository institutions.

The Reserve Banks make disbursements from the government’s account through Fedwire funds transfers or ACH payments, or to a limited extent, by check.  Fedwire disbursements are typically associated with, but not limited to, the redemption of Treasury securities.  Certain recurring transactions, such as Social Security benefit payments and government employee salary payments, are processed mainly by the ACH and electronically deposited directly to the recipients’ accounts at their depository institutions.  Other government payments may be made using Treasury checks drawn on the government’s account at the Reserve Banks.  The Treasury continues to work to move the remaining government payments away from Treasury checks toward electronic payments, primarily the ACH, in an effort to improve efficiency and reduce the costs associated with government payments.

The Federal Reserve plays an important role when the Treasury needs to raise money to finance the government or to refinance maturing Treasury securities.  The Reserve Banks handle weekly, monthly, and quarterly auctions of Treasury securities, accepting bids, communicating them to the Treasury, issuing the securities in book-entry form to the winning bidders, and collecting payment for the securities.  Over the past several years, the auction process has become increasingly automated, which further ensures a smooth borrowing process.  For example, automation has reduced to only minutes the time between the close of bidding and the announcement of the results of a Treasury securities auction.

Treasury securities are maintained in book-entry form in either the Reserve Banks’ Fedwire Securities Service or the Treasury’s TreasuryDirect system, which is also operated by the Reserve Banks.  Even though TreasuryDirect holds less than 2 percent of all outstanding Treasury securities, it provides a convenient way for individuals to hold their securities directly, rather than with a third party such as a depository institution.  Individuals purchase Treasury securities either directly from the Treasury when they are issued or on the secondary market, and they instruct their broker that the securities be delivered to their TreasuryDirect account.  Once the securities are deposited there, the ACH directly deposits any interest or principal payments owed to the account holder to the account holder’s account at a depository institution.  A Reserve Bank, if requested, will sell securities held in TreasuryDirect for a fee on the secondary market, even though this is a service intended for individuals who hold Treasury securities to maturity.
The Federal Reserve also provides support for the Treasury’s savings bonds program.  Although savings bonds represent less than 5 percent of the federal debt, they are a means for individuals to invest in government securities with a small initial investment, currently $25.  The Reserve Banks issue, service, and redeem tens of millions of U.S. savings bonds each year on behalf of the Treasury.  As authorized by the Treasury, the Reserve Banks also qualify depository institutions and corporations to serve as issuing agents and paying agents for savings bonds.

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