WSJ: Fed to Get $200 Billion Boost

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The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.

Officials sought to dispel the notion that the move marks a step toward tightening credit now.

Fed Chairman Ben Bernanke, testifying before the House Financial Services Committee on Wednesday, is likely to reiterate assurances that the Fed will keep short-term interest rates low for an "extended period," meaning at least several more months, because inflation is low and the economy is burdened by lots of excess capacity.

The Treasury borrowing is part of an unusual dance the Fed has undertaken to manage a balance sheet that has grown large and complex.

The Treasury initiated the program—the Supplemental Financing Program—during the peak of the financial crisis in 2008 to get cash to the Fed to fund programs that pumped credit into the financial system. The Treasury reduced the program last year as its own borrowing authority approached legal limits. Now that Congress has raised the government debt limit, Treasury was able to revive it.

"The intention always was to resume [the program] when the debt ceiling was increased on a permanent basis, which finally happened earlier this month," said Lou Crandall, a money-market analyst at Wrightson ICAP LLC.

In 2008, as it reduced short-term interest rates nearly to zero, the Fed used the Treasury deposits to fund interventions without printing money. As the economic outlook worsened and the size of Fed interventions grew, the Fed began printing money, or, technically, crediting the electronic accounts of banks with funds when it made loans or bought securities from them.

Revival of the Treasury program makes it possible for the Fed to avoid printing more money, a step that could lead to inflation, at it develops exit strategies from its interventions.

As of Feb. 10, the Fed had pumped more than $1 trillion into the financial system. That sum had the potential to grow in coming weeks as the Fed completed plans to buy $1.25 trillion of mortgage-backed securities. As of mid-February, the Fed's holdings of mortgage-backed securities stood at $1.025 trillion.

Investors have been jumpy lately about the prospect of Fed tightening. An increase last week in a rate it charges on emergency loans to banks, the discount rate, was misinterpreted by some as a sign of a broader tightening of credit, a notion Mr. Bernanke is likely to refute Wednesday.

Mr. Bernanke, however, is plotting out an eventual exit from his easy-money policies and emphasizing that the Fed has fashioned several innovative tools to achieve that end without unsettling the markets or the economy. When the Fed decides to drain the money it injected into the financial system, a step it will have to take to prevent an onset of inflation, the Treasury program will make that task easier to drain these reserves.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

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Since September, the Treasury has kept the SFP at low levels because of a need to stay below the federal debt ceiling, and the outstanding balance has stood at $5 billion since December. President Barack Obama this month signed a $1.9 trillion increase in the limit to $14.3 trillion.

“This will restore the SFP back to the level maintained between February and September 2009,” the Treasury said in the statement.