The following is excerpted from a discussion with the three key Treasury officials who work on a regular basis with the Federal Reserve. The St. Louis Fed’s Treasury Relations and Support Office (TRSO) oversees the Fed's overall relationship with the Treasury.

Describe the relationship between the Treasury and the Federal Reserve.

DH: The best way to describe the partnership is a long-term, symbiotic relationship that leverages the strengths of both organizations to focus on a common mission.

VZ: I would characterize it as a principal-agent relationship in which the official roles of principal and agent are largely irrelevant because of the Federal Reserve’s and Treasury’s commitment to work together on Treasury fiscal programs.

DH: If you talk to people outside the relationship, they can’t tell where the Treasury stops and the Federal Reserve begins. It is truly seamless to external people.

DG: I think the current relationship is the best that I’ve seen in my career. The TRSO has a large part to do with that. In fact, I think it’s the biggest single factor. The TRSO brings a business mentality and interest in getting things done while at the same time asking good, difficult questions.

VZ: In addition, the TRSO has added an advocacy component. Within the Federal Reserve System, they have become an advocate and educator about the Treasury’s programs. People know what we do. They know that things aren’t handled behind the curtain; they’re out there on the table.

How does the Treasury decide when it wants the Federal Reserve involved in a function or project?

DG: The expertise that the Federal Reserve has in the area of payments is, to me, a natural fit when we look at, for example, modernizing our payments system. We look at what the Federal Reserve has that can complement the expertise that we have at the Treasury, whether it’s in dealing with an issue or developing a new system. We are also looking at whether there is a cultural match, meaning, we look at the Fed’s senior leadership and determine if they seem on board with what we are trying to do.

VZ: With the Federal Reserve, there’s a certain sense of stability and a comfort level culturally and technologically. This allows us to focus on the best of the best way to get something done, as opposed to being held somewhat captive to other more structured and rigid processes. So, the flexibility of our relationship with the Federal Reserve enables us to concentrate on things that maybe we wouldn’t have been even able to get to if we were putting everything out for bid and dealing with a new partner for every project that came along.

DH: I think that is highlighted when you look at things that are not standardized commercial processes. If you look at the work that we have given to the Fed versus our work that is out in the commercial sector, the commercial work is a commodity, meaning we are looking for someone to help us apply a known process. That’s a straightforward relationship to manage. We involve the Fed for things that are a little more fluid and innovative.

What is the future of the relationship? Will the growth of electronic payments and issuance of debt instruments necessitate an even deeper relationship? If and when the time comes when 100 percent of transactions are electronic, will the partnership have a new focus and purpose?

DH: I can’t imagine a fundamental change in the relationship looking forward from what we have today. Aspects of it will certainly be changed as the environment changes, but the relationship itself is well-positioned to deal with the future.

DG: On that point, when we first talked to the Fed about supporting us on stored-value cards, it was a bit different for all of us. But the more we thought about it, we realized that this is still related to payments and really very much in line with what we’ve been doing. And that’s what will continue to happen: Our missions probably won’t change that much, but the nature of how we perform those missions will make for different products.

VZ: Like anyone else, if you can do things at different locations and achieve efficiencies, you try to do that. So, to the extent that we have more opportunities to work more efficiently, I’ll expect we’ll rise to the challenge. Sometimes it’s hard to think what’s beyond all-electronic. I don’t know that I know. But I think there probably is something beyond all-electronic, and it may have more to do with customer relationships and the speed with which information is available. I think controls and security are going to become increasingly more of interest. The Federal Reserve and the Treasury will continue to innovate and find ways to deliver better services, but do it in a way that both organizations are comfortable with.

Are there times when the Treasury and the Fed differ on strategies and tactics? If so, how are those situations resolved?

DH: Obviously, there are differences. And you would hope for differences, frankly, because everyone brings different perspectives and experiences. If you didn’t have differences from time to time, you’d wonder what the nature of the relationship was. From my standpoint, these types of things get resolved professionally and in a business-like manner.

DG: The important thing is that people at the Federal Reserve are willing to provide their perspectives, and that’s key. If you don’t have that, then what you have is one side feeling constrained from providing the very expertise and insight that we are looking for.

VZ: Hopefully, there’s a sense that when we are asking for something or suggesting a direction, there’s more to it than just the edict or directive—that there is a willingness to explain to the Fed why we want to do it. That indicates our respect for the relationship.

The Fed’s reimbursable services have gone up over the past few years, even as some operations (e.g., TreasuryDirect and savings bonds) have been consolidated. What are the reasons for the increases? Are the Fed’s costs expected to level off at some point or keep increasing due to initiatives like software development and new applications?

DG: The reason they’ve been increasing is that we’ve been asking the Fed to do more. The development of the TWAI (Treasury Web Application Infrastructure) and the number of very large development initiatives we have under way are expensive. I expect that the costs are going to increase more over the next few years. But I would hope to see them start leveling off in two or three years, and then I would also hope to see them change direction even as we add more work.

VZ: In Public Debt, we’re trying to get more focused on tightening our costs, particularly our costs per unit. As we do that, we are making very sure we know where the bureau’s costs are coming from and where the Fed’s costs are coming from.

Even as electronic payments have taken hold so quickly, are you surprised that there is a hard-core group that remains so difficult to convert? How do you convince these people that electronic forms of payment are easy and secure?

DH: I continue to be ever increasingly surprised in places where I never thought there would be resistance. I saw a study recently that reported that 58 percent of employers in the United States do payroll by hand. When you hear something like this, it gives you an idea of some of the uphill climb we still have in terms of universal acceptance of electronics.

DG: In many respects, from my perspective, consumers have been well ahead of industry and banking. Individuals have been a lot more receptive to innovation. I think there is another 10 percent of the general public out there that we can pretty easily get if we had some kind of semi-hard mandate. But there is also a segment without bank accounts who will continue to get checks until the next generation comes along with people who don’t know what a check is.