Set a limit on the U.S. Treasury General Account (TGA)? Will Walsh conduct such a "balance sheet reduction"?

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Fed chair nominee Waller supports the "balance sheet reduction" plan, and a long-overlooked mechanism is getting renewed attention—setting a cap on the Treasury General Account (TGA). While the idea is sound in theory, the Treasury is unlikely to allow it.

According to “Chasing the Wind Trading Desk,” Bank of America Securities interest rate strategist Katie Craig breaks down the logic in a research note: Setting a cap on the TGA would direct any excess cash into the banking system as reserves. With higher reserves, the Fed could restart Quantitative Tightening (QT)—selling assets and draining reserves—to ultimately achieve a net reduction in its balance sheet.

The logic is sound, but she is clear in her assessment: this plan is "extremely unlikely" to be implemented. There has been no official communication from the Fed or Treasury on this, and the Treasury does not want a smaller TGA at all. This year, the Treasury's rolling 5-day average outflow is around $825 billion, with spikes during large repayments or tax refund periods.

Notably, TT&L isn’t a new concept—before the financial crisis, the Fed operated this mechanism for the Treasury. After reserves became abundant post-crisis, TT&L gradually faded out. Canada and the UK still have similar setups, but it would be difficult for the US to replicate.

TGA—A Key Variable on the Fed’s Liability Side

The Fed’s main liabilities are made up of three parts: (1) currency in circulation; (2) the Treasury General Account (TGA); (3) commercial bank reserves.

Bank of America points out that the TGA is a liability on the Fed’s balance sheet: when the Treasury deposits funds, the Fed’s liabilities increase; when the Treasury spends, liabilities decrease. The TGA is one of the largest and least controlled liability items for the Fed. The Treasury’s minimum cash target is the sum of estimated outflows over the next five days, averaging about $825 billion so far this year, with periodic jumps around large repayments or tax refund seasons.

The Fed has previously managed the TGA: before the 2008 global financial crisis, the Fed executed the Treasury Tax & Loan (TT&L) program, meaning tax receipts weren’t immediately swept into the TGA but were allowed to stay in commercial banks temporarily. This smoothed TGA inflows and lessened reserve outflows’ impact on money markets.

There were two “incentives” in this system: the Treasury earned interest on TT&L deposits but not on TGA balances; and the funds were more flexibly used for term investments or Treasury repo.

As Fed reserves became abundant, TT&L use shrank, and the Fed saw its necessity greatly reduced.

Modern Options: Cap TGA or Restart TT&L

If today TGA was capped or TT&L restarted, BofA/Merrill’s research team outlines a two-stage mechanism:

Phase A: Treasury funds move to banks as TT&L-like depositsFed’s balance sheet: TGA down $100, reserves up $100 — total size unchangedBanks: $100 more in reserves (assets), $100 more in Treasury deposits (liability)

Phase B: Fed restarts QT, shrinking the balance sheetFed: Treasury securities down $100, reserves down $100 — total size shrinksBanks: $100 fewer reserves, $100 more securities — net change zero

This two-step process would let the Fed meaningfully shrink its balance sheet while keeping overall bank reserves steady. The Treasury’s net interest cost would roughly offset, as the interest on deposits would be similar to interest on debt.

Three Key Practical Obstacles

Despite sound mechanics, BofA/Merrill is highly skeptical about real-world implementation, citing three major hurdles:

The Treasury doesn’t want a smaller TGA: TGA isn’t just a savings account; it has to cover intra-day large payments with unpredictable timing. Too low a balance brings liquidity risks.Banks may say no: Flows in and out of Treasury deposits are hard to predict and much less stable than regular retail deposits, making bank liquidity management more difficult.Extreme volatility during debt ceiling crises: Every time the debt ceiling is hit, TT&L-type accounts experience wild swings, making them much harder to manage.

Combined, these obstacles leave little motivation for the Treasury to actively pursue this plan. Neither the Fed nor Treasury has ever mentioned restricting the TGA or reviving TT&L in their official communications.

How Canada and the UK Do It—But the US Cannot

BofA/Merrill compares the US with two foreign cases:

Canada (BoC’s RG auction mechanism):

The Bank of Canada conducts daily “Receiver General Account” (RG) auctions on behalf of the federal government, placing government deposits with banks overnight or short-term, earning interest for the government—expected C$22.3 million in interest for all of 2026.

Demand for the auctions corresponds closely with banking system settlement balances. When funding gets tight and repo rates diverge from the central bank’s target, the Bank of Canada adds its own overnight and term repo operations.

UK (DMO’s active cash management):

The UK’s setup is more radical: the Debt Management Office (DMO), not the Bank of England, manages the government’s account. The DMO uses bilateral repo and deposit activities each day to smooth fiscal flows and keep reserves steady, leaving the BoE able to focus on rate management undisturbed by fiscal account fluctuations.

But this framework requires more temporary debt issuance to adjust liquidity, while the US Treasury is committed to “regular and predictable” debt sales—a direct conflict.

Even If Implemented, the Effect Would Only Be Temporary

If the TGA is capped or TT&L restarted, the initial effect is looser dollar funding: cash flows from the TGA into bank reserves and on to money markets, creating downward pressure on short-term rates. But this window would not last—as soon as the Fed restarts or speeds up QT, the extra reserves are quickly drained and funding conditions revert.

BofA’s assessment: for net interest, Treasury’s income on TT&L deposits would roughly offset debt costs—nearly neutral. But operationally, the difficulties are significant, and TT&L balances may swing wildly during debt ceiling negotiations, creating new instability.

Therefore, BofA concludes that while capping the TGA or reviving TT&L could, in theory, marginally shrink the Fed’s balance sheet, this pathway is unlikely to come to fruition.

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The above content is from Chasing the Wind Trading Desk.

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