A day after the Federal Reserve Board bailed out American International Group Inc. with an $85 billion loan, the Treasury Department announced a plan to help the central bank expand its balance sheet.
The Treasury said Wednesday that under its "temporary financing program" the government would sell Treasury bills on the open market and send the cash it generates to the Federal Reserve Bank of New York.
The cash would be used to support the Fed's wide range of lending programs, including the discount window and other cash and securities auctions.
Concerns have grown that the Fed is dedicating too much of its balance sheet to liquidity programs to shore up the banking industry. Some analysts interpreted the Treasury plan as an admission that the Fed is running out of money.
"Treasury today announced it will raise 'supplemental' funds — translation: the Fed has run out of money," according to a note distributed by Federal Financial Analytics Inc. "This is not only because of the emergency $85 billion loan for AIG, but also because of the huge draws on the Fed's various discount facilities and … the increasingly speculative collateral backing them."
As of Wednesday the Fed's balance sheet totaled $924.2 billion, including, by some estimates, nearly $400 billion tied up in lending facilities.
The Treasury's plan also will give the Fed a better control of the money supply, keeping interest rates low.