U.S. Treasury vs. Federal Reserve: What's the Difference?

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The U.S. Treasury manages the federal government’s money: it collects taxes, pays the government’s bills and borrows by selling Treasury securities. The Federal Reserve is the nation’s central bank: it sets monetary policy, supervises banks and runs parts of the payment system. In short, the Treasury handles the government’s budget, while the Fed influences the cost and supply of money for the whole economy. The two cooperate closely, and the Fed even holds the Treasury’s main bank account, but neither controls the other.

Two kinds of Treasury reserve show where the institutions meet: the cash the Treasury keeps in its operating account at the Fed, and the government’s gold. Both are covered below.

Treasury vs. Fed at a Glance

What the Treasury Does

The Department of the Treasury is much older than the Fed. Congress established it in 1789, and Alexander Hamilton served as the first Secretary. Its core work is running the government’s finances. It collects taxes, pays federal employees and contractors, sends out benefit payments and borrows when spending exceeds revenue.

Its mission is broader than bookkeeping: promoting economic growth and stability at home and abroad, protecting national security by fighting threats to the financial system, and managing the government’s finances and resources. In practice, that includes enforcing sanctions and working against financial crime.

Several well-known bureaus sit inside the Treasury:

• Internal Revenue Service (IRS): administers and collects federal taxes.
• U.S. Mint: produces coins.
• Bureau of Engraving and Printing: prints paper money, which carries the name “Federal Reserve note.”
• Bureau of the Fiscal Service: handles federal payments, collections and the issuance of government debt.

The Treasury Secretary is the president’s chief economic and financial adviser. The Secretary carries out the administration’s economic policies and represents the United States in international financial discussions.

What the Federal Reserve Does

Congress created the Federal Reserve System in 1913. It responded to repeated banking panics and to concern that a handful of large banks and financiers held too much sway over the country’s money and credit.

The system has three main parts:

• Board of Governors: a seven-member federal agency in Washington.
• 12 regional Federal Reserve Banks: for example, the New York Fed and the St. Louis Fed, each serving its own district. Member banks hold stock in their regional Reserve Bank, but the Reserve Banks are not run for profit and the stock does not carry the control rights that ordinary shares do.
• Federal Open Market Committee (FOMC): sets monetary policy. It consists of the seven governors, the president of the New York Fed and four of the other eleven Reserve Bank presidents on a rotating basis.

The Fed’s most visible tool is the target range for the federal funds rate, the rate banks charge each other for overnight loans. Changes in that target ripple into rates on mortgages, credit cards, auto loans and business credit. Higher rates tend to slow borrowing and spending, which can bring inflation down; lower rates tend to encourage activity. The Fed also buys and sells securities in pursuit of its dual mandate of maximum employment and stable prices.

Beyond monetary policy, the Fed supervises and regulates many banks, works to keep the financial system stable and provides payment services to banks and to the government.

The Fed is not funded through congressional appropriations. Its income comes mainly from interest on the securities it holds, much of it Treasury debt. After expenses, dividends to member banks and other required costs, the Reserve Banks send their excess earnings to the Treasury. When the interest the Fed pays on bank reserves exceeds what it earns on its holdings, remittances stop. The Fed then records a deferred asset, which it must work off before regular payments resume.

Where the Treasury Reserve Fits

The Treasury’s main operating account, the Treasury General Account (TGA), is held at the Federal Reserve Bank of New York rather than at a commercial bank. Tax receipts and the proceeds of debt sales flow in, and federal payments flow out. When the TGA balance rises, money moves out of the banking system; when the Treasury spends it down, that money flows back to banks as reserves. That is why Fed officials and market analysts track the balance even though it is a fiscal account rather than a monetary policy tool.

Gold reserves are the other “treasury reserve.” The Treasury holds the U.S. government’s gold, and roughly half of it is stored at the U.S. Bullion Depository at Fort Knox. The New York Fed separately runs a large underground vault where it keeps gold in custody for account holders, including the U.S. government, foreign governments, central banks and international organizations. The Fed acts as custodian for that gold and does not own it.

How the Treasury and the Fed Work Together

The Federal Reserve serves as the government’s bank and fiscal agent. The Reserve Banks process large volumes of federal transactions: receiving electronic payments of Social Security and other taxes, sending payroll and benefit payments, and clearing checks written to and by the government.

Borrowing is the second major area of cooperation. The Treasury decides how much to borrow and in what form, and the Fed runs the auctions on its behalf. The securities sold this way include:

• Treasury bills (short-term)
• Treasury notes (medium-term)
• Treasury bonds (long-term)
• Treasury Inflation-Protected Securities (TIPS)

The New York Fed also carries out Treasury buybacks, in which the Treasury repurchases some of its outstanding debt before maturity.

Where the Treasury Gets Its Money

The Treasury issues bonds; in normal operations it does not buy them. Its money comes from revenue (mostly taxes, plus fees and the Fed’s remittances when it has earnings to send) and from borrowing by selling Treasury securities to investors. When it buys back its own debt, it pays with cash from those same sources, often raised by issuing different securities.

The government does not routinely borrow from the Federal Reserve. The Federal Reserve Act generally requires the Fed to buy Treasury securities in the open market, from dealers and other investors, rather than directly from the Treasury. The Fed pays by crediting banks’ reserve accounts. That electronic money creation is what people often call “printing money,” but the money goes to the sellers in the market, not to the Treasury’s budget.

Secretary of the Treasury vs. Fed Chair

The two officials hold very different kinds of posts. The Secretary of the Treasury is a Cabinet member nominated by the president and confirmed by the Senate. The Secretary serves at the president’s discretion and speaks for the administration’s economic policy.

The Chair of the Federal Reserve is also nominated by the president and confirmed by the Senate, but serves a fixed four-year term as Chair, while members of the Board of Governors serve staggered 14-year terms meant to insulate policy from election cycles. The Chair reports to Congress, including regular testimony on monetary policy, and leads the FOMC, though rate decisions belong to the committee rather than to the Chair alone.

Neither office outranks the other. The Secretary shapes how the government taxes, spends and borrows within the limits Congress sets; the Chair leads decisions on interest rates and the money supply. Fed decisions move borrowing costs quickly, while Treasury policy, through Congress and the president, determines the size of deficits and how much debt the market must absorb.

Responding to Recessions and Crises

Fighting recessions

Both institutions can respond to a downturn, but with different tools. The Fed uses monetary policy: it can cut its target rate and expand its securities purchases to ease financial conditions. The Treasury carries out fiscal policy that Congress and the president authorize, such as tax relief, direct payments or new spending.

Bailing out companies

In a financial crisis the two may act together, but under separate legal authority. The Fed can supply liquidity through its emergency lending powers. The Treasury can provide capital or other financial support only when a law authorizes it. Government-sponsored enterprises such as Fannie Mae and Freddie Mac have received this kind of support, and in severe disruptions assistance has also reached private financial firms and other companies.

Why the Fed and the Treasury Are Separate

The separation is deliberate. The First and Second Banks of the United States were both allowed to lapse, and from 1846 until the Fed’s creation the government ran an Independent Treasury system, keeping its funds in government subtreasuries rather than in private banks. That system offered no way to expand credit during panics, which helped build support for a central bank in 1913.

The modern split took shape after World War II. During the war, the Fed held interest rates on government debt low to help finance the war effort. Pressure to keep doing so afterward clashed with the Fed’s concern about inflation. The Treasury-Fed Accord of 1951 ended that arrangement and established that the Fed would run monetary policy independently of the Treasury’s financing needs.

Separating the institution that borrows from the one that sets the price of money guards against a government holding rates down or creating money to fund spending, which risks inflation.

FAQs

The Bottom Line

Anyone following interest rates, deficits or government debt benefits from knowing which institution controls what. The Treasury taxes, spends and borrows within limits Congress sets, while the Fed sets interest rates and the money supply. The two work closely, yet the Treasury-Fed Accord of 1951 keeps monetary policy separate from the government's financing needs, which guards against holding rates down or creating money to fund spending.