Most people understand the U.S. Treasury and the Federal Reserve are two government agencies that have a significant effect on the U.S. economy. It is important investors understand how these two entities function and how their actions can cause market fluctuations. The following are some of the basic differences between the U.S. Treasury and the Federal Reserve.
Both the U.S. Treasury and the Federal Reserve fulfill two separate and essential functions which help to maintain stability in the economy. The Treasury controls the flow of money coming in and out of the government. The Federal Reserve manages the supply of money circulating throughout the economy.
The Department of the Treasury collects and spends money for the federal government. This means the Treasury collects tax revenues, disperses budget expenditures and issues bills, bonds and notes. It is also in charge of the physical printing of the money in the U.S. The head of the Treasury, Secretary of the Treasury, is appointed by the president. The Secretary of the Treasury provides the president with advice concerning economic and monetary policies.
The Internal Revenue Service (IRS) which is under the Treasury Department is the government agency that collects tax revenues. Also under the Treasury, the U.S. Mint, is the agency in charge of physically printing the bills and minting the coins to be used in the American economy.
The Federal Reserve
Created in 1913, The Federal Reserve supervises and regulates the banks operating within the U.S. The fear of the U.S. financial system being manipulated by a small number of banks was what prompted the creation of the Federal Reserve.
The Federal Reserve is in charge of interest rates on the debt the Treasury issues, which include U.S. Treasuries and bonds. This then influences the interest rates banks will lend to each other which impacts the interest rates of all types of loans to consumers and businesses.
Therefore, when the Federal Reserve raises interest rates, all other interest rates will increase as well. Through moving interest rates up and down, the Federal Reserve can slow down and speed up an economy in order to fulfill its mandate of maintaining maximum employment, price stability and moderate long-term interest rates.
How the Treasury and the Federal Reserve work together
Together the Treasury and the Federal Reserve collaborate with the aim of maintaining economic stability in the U.S. The two entities work together in a variety of different ways.
The Federal Reserve processes the Treasury’s financial transactions made when managing the federal government’s money. This includes processing tax payments, issuing paychecks for government employees and processing various other government receivables.
Also, the two entities work together to allow the federal government to borrow money. The Federal Reserve operates securities auctions on behalf of the Treasury.
Essentially, the Federal Reserve acts as the federal government’s bank. Additionally, any remaining funds the Federal Reserve has left over after paying its expenses are transferred to the U.S. Treasury to be utilized to fund government expenditures.