March 28, 2000


A special issue of the New York Fed’s Economic Policy Review—dedicated to the proceedings of the Bank’s December 3, 1999 conference Fiscal Policy in an Era of Surpluses: Economic and Financial Implications—is available for your review.

Several years of strong real growth and low inflation have transformed the country’s fiscal outlook from one burdened by large budget deficits to one benefiting from two straight years of surpluses, with continued surpluses projected over the next decade.

This solid fiscal performance, however, has presented a challenge to U.S. and world financial markets, as they adjust to a shrinking supply of new Treasury debt resulting from the surpluses.

During the one-day conference, more than 100 market participants, policymakers, and academics met to discuss recent trends in federal receipts and outlays, the federal budget’s effect on the economy, and the financial market consequences of a decline in Treasury securities.

Among the key points raised at the conference were:

  • Much of the nation’s fiscal improvement can be traced to the rapid growth of individual tax receipts resulting from the shift in income distribution and from sizeable capital-gains realizations.

  • Despite the outlook for continued surpluses over the next decade, longer-run projections suggest a return to large deficits as the "baby boom" generation retires.

  • Automatic stabilizers, such as the progressive income tax and transfer payments, continue to moderate economic fluctuations.

  • Although it is difficult to project the budget and the level of Treasury debt, over the coming decade the ratio of Treasury debt to GDP is expected to decline further.

The discussion also focused on the Treasury market’s benchmark role and the implications of the market’s recent performance for the use of Treasury securities as a pricing and hedging tool. The participants discussed the following points:

  • To enhance market liquidity amid declining volumes of new issues, the Treasury might consider issuing 104-week bills and allowing market participants to create new stripped instruments by exchanging with the Treasury coupon securities or principal payments of similar maturities.

  • Some of the attributes that have made the Treasury market a useful benchmark—such as high market liquidity, efficiency, and trading activity—were weakened by the financial market crisis of 1998.

  • The agency debt, corporate debt, and interest-rate swaps markets have features that make them attractive alternative benchmarks to the Treasury market, and the agency debt and swaps markets already are assuming a limited benchmark role.

Contact: Douglas Tillett or Steven Malin

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