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

U.S. Treasury vs. Federal Reserve: An Overview

The U.S. Treasury and the Federal Reserve are separate entities. The Treasury manages all money coming into the government and that's 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 the nation's private banks and manage the overall money supply to keep the inflation rate and the employment rate stable. The Federal Reserve Board is accountable to the U.S. Congress, not the President.

The U.S. Treasury

The Department of the Treasury is by far the older of the two institutions. It was established in 1789. Alexander Hamilton was 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.

It's perhaps best known for its role in collecting taxes and managing government revenue but its official mission is "to maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combating threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively."

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."

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. financial system was being dominated and manipulated by a small number of banking 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. The Fed strives to warm up a tepid economy or cool down a too-hot economy by encouraging or discouraging lending and borrowing. The right balance keeps inflation and unemployment in check.

The overall 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. It's an independent government entity that includes 12 regional Federal Reserve Banks. They're not operated for profit. Their stockholders are the privately owned banks that fall under the Federal Reserve System.

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:

• 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. Any remaining profits are paid to the Department of the Treasury after its expenses are paid. 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 $76 billion to the Treasury in 2022. The Federal Reserve not only helps to make and implement policies but also serves as the government's bank and generates a portion of the revenue used to fund the nation's activities.

Special Considerations

Fighting Recessions

The two entities help to formulate and put in place economic policies designed to stimulate the economy when times are tough by reducing interest rates and making more money available to banks and consumers.

The Department of the Treasury is responsible for taking money out of the Federal Reserve and putting it into the hands of consumers when a decision is made to issue tax rebates. Consumers spend the money in turn. They funnel money into the economy through their spending, 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 together to support government-sponsored enterprises such as Fannie Mae and Freddie Mac. The Federal Reserve can provide access to funds at a discounted borrowing rate when these entities run into financial trouble. 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. The U.S. government initiated the bailout as a Federal Reserve-led action but 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.

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