MONETARY POLICY FEDERAL RESERVE

HOW THE FED’S INTEREST RATES AFFECT CONSUMERS

U.S. Treasury vs. Federal Reserve: What’s the

Difference?
By LISA SMITH Updated June 29, 2021

Reviewed by ROBERT C. KELLY

U.S. Treasury vs. Federal Reserve: What’s the Difference?

The U.S. Treasury and the Federal Reserve are separate entities. The Treasury manages all of
the money coming into the government and paid out by it. The Federal Reserve's primary
responsibility is to keep the economy stable by managing the supply of money in circulation.

The Department of the Treasury manages federal spending. It collects the government's tax
revenues, distributes its budget, issues its bonds, bills, and notes, and literally prints the
money. The Treasury Department is headed by a Cabinet-level appointee who advises the
president on monetary and economic policy.

The Federal Reserve is the central banking system of the United States and is run by a board of
governors that oversees 12 regional Federal Reserve Banks. Its primary goals are to regulate
th ti ' i t b k d th ll l i d t k th i fl ti
the nation's private banks and manage the overall money supply in order to keep the inflation Ad

rate and the employment rate stable. The Federal Reserve Board is accountable to the U.S.
Congress, not the president. [1]

KEY TAKEAWAYS
The U.S. Treasury is best known for printing money (literally) and offering economic
advice to the President.
The Federal Reserve is the U.S. central bank, ensuring lenders and borrowers have
access to credit and loans.
The two work together to provide a stable U.S. economy and borrow money when the
government needs to raise cash.
The two are instrumental in fighting recessions and bailing out institutions when
necessary.

The U.S. Treasury

The Department of the Treasury is by far the older of the two institutions. It was established in
1789, with Alexander Hamilton as its first secretary. The primary task of the Treasury secretary
is to advise the president on domestic and international economic issues and implement the
administration's economic policies.

While it's perhaps best known for its role in collecting taxes and managing government
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revenue, its official mission is to "serve the American people and strengthen national security

by managing the U.S. government's finances effectively, promoting economic growth and
stability and ensuring the safety, soundness, and security of the U.S. and international
financial systems." [2] [2]

$54 billion
The estimated amount paid by the Federal Reserve to the U.S. Treasury in 2019.

To accomplish its mission, the Department provides economic advice to the President and
works with other federal institutions, including the Federal Reserve, to "encourage global
economic growth, raise standards of living and to the extent possible, predict and prevent
economic crises." [2]

The Internal Revenue Service is under the Department of the Treasury, as is the U.S. Mint that
prints America's bills and mints its coins.

The Treasury really is a treasury, too. It stores most of the nation's gold supply in a vault at the
New York Fed. This is one example of how the responsibilities of the Treasury and the Federal
Reserve overlap.

The Federal Reserve

The Federal Reserve System was created in 1913 in response to growing concerns that the U.S.
fi i l t b i d i t d d i l t db ll b f b ki
financial system was being dominated and manipulated by a small number of banking Ad
institutions for the benefit of a few of the business titans of the day.
Its most visible role is in adjusting the interest rates paid for U.S. Treasuries, bonds, and other
debt issued by the Treasury. The changes the Fed decrees directly influence all other lending
rates for consumers and businesses. By encouraging or discouraging lending and borrowing,
the Fed strives to warm up a tepid economy or cool down a too-hot economy. The right
balance keeps inflation and unemployment in check.

Overall, the goal is to ensure that lenders and borrowers have sufficient access to money and
credit.

The Federal Reserve also supervises and regulates banks operating in the U.S.

To answer a frequently-asked question, no one owns the Federal Reserve, and no one profits
from its operations. It is a not-for-profit entity that provides services to American financial
institutions on behalf of the U.S. government.

Key Differences
The Department of the Treasury and Federal Reserve work together to maintain a stable U.S.
economy.

The Federal Reserve serves as the government's banker, processing transactions. These
include accepting electronic payments for Social Security taxes, issuing payroll checks to
government employees, and clearing checks for tax payments and other government
receivables.

The Federal Reserve and the Department of the Treasury also work together to borrow money
when the government needs to raise cash. The Federal Reserve conducts Treasury securities
auctions on behalf of the Department of the Treasury. Examples of Treasury securities include:
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Treasury bonds
Treasury bills
Treasury notes
Treasury inflation-protected securities (TIPS)

The Federal Reserve and the Department of the Treasury are linked in another way. The
Federal Reserve is a nonprofit entity. After its expenses are paid, any remaining profits are
paid to the Department of the Treasury. The Department of the Treasury then uses that money
to fund government spending.

It's a relationship that produces a considerable amount of money. The Federal Reserve
contributed an estimated $54.9 billion to the Treasury in 2019. [3] So, the Federal Reserve not
only helps to make and implement policies but serves as the government's bank and
generates a portion of the revenue used to fund the nation's activities.

Special Considerations
Fighting Recessions
When times are tough, the two entities help to formulate and put in place economic policies
designed to stimulate the economy by reducing interest rates and making more money
available to banks and consumers.

When a decision is made to issue tax rebates, the Department of the Treasury is responsible
for taking money out of the Federal Reserve and putting it into the hands of consumers.
Consumers, in turn, spend the money. Through their spending, they funnel money into the
economy, resulting in increased sales of consumer goods and more jobs to produce and
distribute those goods.

Bailing out Companies

The Federal Reserve and the Department of the Treasury may also work in concert to support
government sponsored enterprises such as Fannie Mae and Freddie Mac When these entities
government-sponsored enterprises such as Fannie Mae and Freddie Mac. When these entities Ad
run into financial trouble, the Federal Reserve can provide access to funds at a discounted
borrowing rate, while the Department of the Treasury can increase the line of credit that it
makes available to the entities, and even purchase their stock shares.

The assistance they provide can also be extended to non-governmental corporations. The
collapse of investment bank Bear Stearns in 2008 is one such example. Officials from the two
entities loaned about $29 billion in taxpayer funds to facilitate JP Morgan's purchase of Bear
Stearns. While the U.S. government initiated the bailout as a Federal Reserve-led action, any
losses incurred would come out of the Treasury's funds.

Similar government-sponsored bailouts of non-governmental corporations took place in the

airline industry in 2001, the savings and loan industry in 1989, and at Chrysler Corporation in
1979.

While the Federal Reserve and the Department of the Treasury are separate entities, they work
closely together. The partnership takes action at the macro level by addressing economic
weakness through fiscal stimulus. At the micro-level, it can pour money into failing companies
to blunt the impact of their troubles on their workers and on the economy. In this way, both
entities seek to protect the financial health of the U.S.

ARTICLE SOURCES
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Related Terms
Federal Reserve System (FRS) Definition
The Federal Reserve System is the central bank of the United States and provides the nation with a safe,
flexible, and stable financial system. more

What is the Federal Housing Finance Agency (FHFA)?

The Federal Housing Finance Agency (FHFA) is a U.S. government agency that regulates the secondary
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What Is a Policy Mix?

A policy mix is a combination of fiscal and monetary measures enacted jointly in order to strengthen or
stabilize a nation's economy. more

What Is the U.S. Treasury?

Created in 1789, the U.S. Treasury is the government (Cabinet) department responsible for issuing all
Treasury bonds, notes, and bills. Discover more here. more

Treasury Bills (T-Bills)

A Treasury Bill (T-Bill) is a short-term debt obligation issued by the U.S. Treasury and backed by the U.S.
government with a maturity of less than one year. more

Bailout Money Helps Failing Businesses and Countries

A bailout is an injection of money from a business, individual, or government into a failing company to
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