Column-Deflating 'QT cushion' may have raised red Fed flag: Mike Dolan
By Mike Dolan
LONDON (Reuters) — Any real economy crunch from the U.S. Federal Reserve's balance sheet rundown may have been softened to date, but the air is rapidly escaping from one of its key cushions.
Whether last week's rhetorical shift by the Fed acknowledges this potential crunch is an open question, but credit and liquidity watchers are calling time on how long 2023's commercial bank reserves at the Fed can remain so stable.
Debate centers on the spaghetti of financial liquidity management related to the Fed's 'quantitative tightening', where it has been gradually offloading its still $7.8 trillion balance sheet hoard of bonds and bills over the past 18 months.
That stash, which more than doubled to a peak of almost $9 trillion last year after the pandemic shock, effectively bought bonds from banks and credited them with commercial bank reserves held at the Fed, against which those banks could then go on and lend on to business and households.
Since mid-2022, QT has been rolling these securities off the Fed's balance sheet at a pace of $95 billion a month.
But the Fed has also been soaking up what Atlanta Fed boss Raphael Bostic once described as «pure excess liquidity», via its daily reverse securities repurchase facility (RRP) — which at its peak in January hit £2.4 trillion.
Attractive as a parking lot for money market funds and banks as the Fed hiked the returns on these 'reverse repos' in line with its policy rates, the money tucked away there is now exiting at breakneck pace — scrambling to lock into a flood of new longer maturity bills and bonds before Fed rates fall.
Daily reverse repo totals have now dropped by about $1.6 trillion to just $768 billion last week.
And at the pace at which the RRP has
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