Fed liquidity drops $409bn, hitting lowest since December 2022. Reverse Repo increased $213bn on December 31 for window-dressing. Fed liquidity will decline, stressing funding markets until mid-2025.

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From my perspective, the main takeaway is that Fed liquidity has been locked into a “stair-stepping downwards” pattern since April 2024.

Starting from a new lower base at the beginning of every quarter.

The “stealth QE” that occurred during 2023 is now being wiped away.

From now on, Fed liquidity will likely continue to generally fall over time, reaching a new low every end-of-quarter, until at least one of the following things happens:

1⃣ The Fed stops Quantitative Tightening (ending downward pressure on liquidity)
2⃣ The Treasury General Account is meaningfully drained (liquidity injection, but only temporary)
3⃣ Another new “temporary” Fed liquidity facility is implemented (like the Bank Term Funding Program in March 2023)

I think there is a good chance that no. 1 and/or no. 2 will happen in the first half of 2025.

Until then, the Fed will be putting more and more stress on funding markets, particularly at end-of-quarters – inching slowly closer to a level of “scarce” bank reserves and a potential 2019 Repo Crisis-style event.

More liquidity is always coming – eventually.

It’s just a question of how far the Fed is willing push things before giving up.

https://x.com/Mayhem4Markets/status/1875041406269772084

https://twitter.com/MichaelMOTTCM/status/1874972955652006302

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