by Calculated Risk on 11/17/2008 06:21:00 PM

One of the credit indicators I was tracking was the activity in the Treasury's Supplementary Financing Program (SFP). This was the Treasury program to raise cash for the Fed's liquidity initiatives.

Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet. The Treasury announced today that the program will be unwound.

The balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government's financing needs.

More from MarketWatch: Unwind of special T-bill program will free up capital

The Treasury said the balance in its so-called supplementary financing account will decrease in coming weeks as bills in the program mature.
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The special financing program was created two months ago. The Treasury said it would issue bills separate from its regular borrowing program to help the Federal Reserve manage the impact of its efforts to pump extra money into the financial system, such as by lending money to broker-dealers.

The program, which peaked at $559 billion, effectively drained cash from the financial system, offsetting some of the Fed's efforts to pump more money into markets. An offsetting mechanism was necessary for the Fed to keep its effective fed funds target rate from slipping to 0%.
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The need for the Treasury's special financing program waned after the Fed started paying interest on bank reserves, which also took money from the financial markets, analysts said.

This is a minor but necessary step ...