If the US Treasury wins a big enough increase in the $14.3 trillion limit on the nation's debt, it will likely use some of its new-found resources to help the Federal Reserve when the central bank finally decides to tighten monetary policy.
Fed watchers say there is logic in replenishing the Supplementary Financing Program, which the Treasury set up to help the Fed manage its fast-growing balance sheet during the financial crisis. The Treasury has shrunk the program to just $5 billion in its quest to stay under the borrowing cap. The SFP would come in handy when the Fed starts to drain money from the economy and could help ease an acute shortage of Treasury bills in money markets.
"If it weren't for the debt ceiling, the SFP would still be there," said Dana Saporta, an economist at Credit Suisse in New York. "There are benefits to ramping it back up."
It would take a debt limit increase of $2 trillion or more to give the Treasury enough borrowing headroom to restore the Fed account back to its previous $200 billion level and finance the federal government through late 2012.
Many Republican lawmakers want a smaller, short-term debt ceiling increase to keep pressure on the Obama administration for deeper spending cuts. This would make funding the SFP more problematic, as it would need to be quickly drawn back down.
The Treasury launched the program in 2008 when emergency Fed lending to banks exploded as financial markets froze.
The SFP gave the Fed a method to offset some of that lending to prevent an unintended easing of monetary policy by selling Treasury bills and then locking up the cash proceeds in the Fed account. Future bill sales from the SFP would play the same role by drawing money out of the banking system.
At its peak in November 2008, the SFP reached $559 billion, or about half of the Fed's $1 trillion expansion in bank reserves during the crisis.