WASHINGTON — 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 its "temporary financing program" would allow it to 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 loans through the discount window and other cash and securities auctions.
The move comes as concerns have grown that the Fed is dedicating too much of its balance sheet to liquidity programs designed to shore up the banking industry. Some analysts interpreted the move 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 and, by some estimates, upwards of $400 billion of that is tied up in lending facilities.
The Treasury's move has the added benefit of giving the Fed a better control of the money supply and, therefore, keeping interest rates low.
