WASHINGTON (AP) – The Treasury Department will begin selling bonds for the Federal Reserve in an effort to help the central bank deal with unprecedented borrowing needs resulting from the current credit crisis.
Treasury officials said Wednesday that the new program would be conducted in the same way that the government sells billions of dollars of regular Treasury securities each week to finance the government’s budget deficits.
Those deficits have been soaring because of the current economic slump with this year’s deficit expected to hit $400 billion, more than double last year’s $161.5 billion. The administration is projecting that the deficit for the 2009 budget year, which begins Oct. 1, will soar to an all-time high of $482 billion.
The country’s economic troubles have reduced tax revenues and increased government spending including the cost of the $168 billion economic stimulus effort Congress passed earlier this year to give the economy a boost.
Treasury officials said that the first auction to raise cash for the central bank would be for a total of $40 billion and would occur later Wednesday. The auction would be for cash management bills that will mature in 35 days.
The announcement represented an unprecedented action in which Treasury will be selling debt securities in the form of Treasury bills for the nation’s central bank.
Treasury officials said the action did not mean that the Fed was running short of resources but simply was a way for the government to better manage its financing needs.
The announcement came one day after the Fed invoked powers it had been granted during the Great Depression to extend an $85 billion emergency loan to prop up the country’s largest insurance company, American International Group Inc.
Since the credit crisis hit in August 2007, the Fed has also been providing billions of dollars in extra resources to the nation’s commercial banks and investment banks in an effort to keep the financial system functioning in the wake of rising loses on mortgage debt.
Treasury said that the announcement of the new program, to be called the Supplemental Financing Program, will be governed by existing Treasury auction rules with Treasury providing as much advance notification of the auctions as possible.