What's the difference between the Treasury And the Fed?

Just last month, I was wondering what exactly is the difference between the U.S Treasury Department (the Treasury) and the U.S Federal Reserve (aka "the Fed"). A news item in the last few days about a kerfuffle between the Treasury and the Fed piqued my interest, but I wasn't able to understand the nature of the discord. So I did the common thing: I googled the difference. Among the list of results, the one that seemed to resonate the most was from Investopedia. However, it didn't seem to answer the nagging question that I was trying to answer.

Weren't both of these entities part of the Executive Branch and both report to the U.S President? So, why then was there any discord? The two departments are generally described together (especially when it comes to monetary policy and bailouts) but I could never distinguish their functions, nor the relationship between the two. So I decided to dig a little deeper; multiple google searches, readings and re-readings later, here is what I learned.

The Treasury Vs. The Fed

As per the Treasury Department's website, The Treasury operates and maintains systems that are critical to the nation's financial infrastructure. Among the many functions that it does perform, one is to build up the monetary reserves (sometimes literally by printing currency and coin, and otherwise by collecting taxes from the citizens); But to do this role effectively and to collect, store and move the money around it uses an institution called the "Federal Reserve". One way to think about this is the Federal Reserve is a bank, and the U.S. Treasury is its customer.

Just as banks can, and do, publish interest rates or issue instruments for investments like bonds, the Fed also does all these things. For example, the bonds in this case are called the T-Bills or Treasury-Bills; In addition, the Fed offers loans to commercial banks and other entities which in turn makes that money supply go around. The Fed earns profit from the interest that it collects from the money "loaned" to commercial banks, or incurs losses from bad loans it issues. All so far, is pretty much as how a normal bank behaves.

'The Fed' is also expected to work as a non-profit bank meaning that any profits "earned" by the Fed must be returned to the customer in this case, the Treasury. The Fed then essentially behaves as an instrument of the Treasury in order to make the banking systems work. It is important to note that "the Fed" is a virtual entity, made up of 12 federal regional banks, each representing one of the 12 geographic regions of the US.

Hopefully that answers the main question of the difference between the Treasury and the Fed and the relationship between the two.

To answer the question behind the question (i.e. what is going on in the row between the Fed and the Treasury), read on.

The CARES Act, and the discord between the Fed and the Treasury

When the U.S. Congress passed the Corona Virus Aid Relief and Security (CARES) act in March 2020, it authorized the Treasury to spend $2.2 trillion (either from existing funds or by printing money as needed). As detailed in this article well, the chart below describes the break down of the $2.2 trillion. For comparison, all of the quantitative easing policies from 2008-10 totaled up to approximately $800 billion.

Although Congress gave authority to the Treasury to directly give money to certain verticals ($29B towards airlines, $17B towards businesses critical for national security, etc.) for the first time it also insisted that $454B be invested in programs or facilities established by the Federal Reserve -However, these funds came with strings attached and with control maintained by the Treasury Secretary.

As described by the Brookings Institution article here, The primary sticking point on this provision between Republicans and Democrats was on what strings, if any, should be attached to this money, or whether it could be deployed subject to either Fed or Treasury discretion. Some of the constraints included conditions about loan maturity and interest rates, but also some conditions that Democrats favored in the negotiation, including a restriction on equity buybacks, issuing dividends, and constraints that eligible business shall maintain some employment levels (but with a caveat -- "if feasible"), while Republicans favored discretion-granting language for the Treasury (For example, the Secretary should “in the Secretary’s discretion” determine that these conditions are met). The end result of these muddled language and ambivalent text is that not many institutions or companies either met the standards or chose to take advantage of this money.

According to the Government Accountability Office note dated December 10, 2020, the Federal Reserve, has committed $195 billion of the allotted $454 billion as of November 2020.

Furthermore, in recent talks between Congress and the Treasury Secretary, there has been discussions of a second stimulus package with additional money to be allotted. These discussions have have been anchored along political party lines, with questions like "If, and how much, more money should be allotted?".

While these discussions remain on-going, the Treasury secretary has indicated that the Fed hasn't even spent all the money allotted and suggested that a first step was to finish spending what was already approved or at least repurpose it.

In preparation for that, the Treasury Secretary requested that the Fed return any unused money back to the Treasury by the end of the calendar year. The Fed after some righteous indignation (based on fears that the financial markets might see the withdrawal of this money in a negative light) eventually agreed.