Liquidity conditions in the US financial system are deteriorating again — and, for the first time since the 2019 Repo Shock, the Federal Reserve is quietly preparing to reverse course. On October 29th, the Fed announced that Quantitative Tightening will end on December 1st. Two weeks later, senior Fed officials signaled that the next phase of monetary operations will involve resuming asset purchases to keep the system from running short of Bank Reserves.
In this new Macro Watch video, we look closely at why the Fed is shifting direction now, what signals suggest Liquidity has already become dangerously tight, and how much new money the central bank may have to create over the next two years.
A Warning From 2019
This tightening cycle has brought the Fed back to an uncomfortable threshold. Bank Reserves have fallen sharply, repo-market strains have reappeared, SOFR has begun to edge above the Effective Federal Funds Rate, and banks have already tapped the Fed’s Standing Repo Facility — all signs that Liquidity is becoming scarce again.
The last time this happened, in September 2019, the repo market ruptured, SOFR exploded to an intraday peak of 10%, and the Fed lost control of the federal funds rate, which briefly traded above its target range. Within weeks, the Fed reversed QT and created $400 billion to stabilize funding markets.
Could that happen again? This video walks through the parallels — and the key differences — between 2019 and today.
Why The Fed Is Signaling More Money Creation Ahead
In a speech on November 12th, New York Fed President John Williams made the central bank’s next steps unmistakably clear: as reserves fall toward the “ample” threshold, the Fed will begin “gradual purchases of assets” to rebuild reserves and to offset the growth of its other liabilities, including Currency in Circulation.
Roberto Perli, Manager of the Fed’s System Open Market Account (SOMA), reinforced this message the same day, saying:
“We probably won’t have to wait long.”
In this video, we break down what those statements really mean — and why the Fed cannot allow reserves to fall much further without risking another rupture in short-term funding markets.
How Much Money Might the Fed Create?
Even if no new crisis erupts, the Fed appears likely to expand its balance sheet again soon. Based on current debt projections and the Fed’s own operating framework, the analysis in this presentation suggests that the central bank may need to create roughly $600 billion over the next two years simply to maintain stable Liquidity conditions.
Of course, if a new Liquidity Shock occurs — similar to September 2019 — the amount of new money created could be much larger and come much faster.
The implications for asset prices over the next two years could be substantial.
If You Want To Understand What Comes Next…
This video explains:
- Why the Fed is ending QT now
- What the widening gap between SOFR and EFFR really signals
- How Currency in Circulation and the TGA drain Bank Reserves
- Why demand for reserves grows over time
- How the Fed’s balance sheet interacts with the rapidly expanding stock of government debt
- And how much money creation may lie ahead
If Liquidity tightens further, markets may once again force the Fed’s hand — and the consequences for stocks, bonds, and the dollar could be dramatic.
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