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October 1979

TTL Note Accounts and the Money Supply Process

by Richard W. Lang

Since November 1978, when the Treasury changed its cash management procedures, the Federal Reserve has been faced with less uncertainty in managing the week-to-week volume of bank reserves. Weekly swings in the Treasury’s balances at Federal Reserve Banks have been smaller, and the decreased volatility of these balances has reduced the Federal Reserve’s uncertainty about reserve positions. Consequently, Federal Reserve open market operations that are conducted to offset the effects of fluctuations in Treasury balances on bank reserves have not had to be as large as in previous years. This decreased volatility is the result of the introduction of the Treasury Tax and Loan Investment Program. The introduction of this program also has affected the relationship between bank reserves and the money supply. This article discusses the implications of this change in Treasury cash management for the Federal Reserve and the banking system.