Liquidity Watch: The Fed's Next Tightrope Walk is Already Underway
Liquidity Watch: The Fed's Next Tightrope Walk is Already Underway 🧗 The post-SVB financial world remains obsessed with a single chart: the rapid shrinkage of the Federal Reserve’s balance sheet, known as Quantitative Tightening (QT). While the SVB collapse was a failure of individual bank risk management, not systemic liquidity, the current phase of QT introduces a real, structural risk that the Fed is now directly confronting. The biggest story in financial plumbing this month is that the easy part of QT is officially over. The Fed is no longer draining excess "parking lot" cash; it’s now reducing the system's core fuel. 1. The ON RRP Buffer is Gone For the last two years, QT has been largely painless because of one key facility: the Overnight Reverse Repurchase Agreement (ON RRP). The ON RRP's Role: This facility was essentially the financial system's giant parking lot, holding cash for non-bank entities (primarily Money Market Mutual Funds) t...