According to Financial Times News, Wall Street banks are warning that stress in US money markets could flare up again, potentially forcing the Federal Reserve to take swifter action. The difference between the key tri-party repo rate and the Fed’s rate hit its highest level since 2020 last Friday, despite the central bank planning to halt its balance sheet reduction program on December 1. Citigroup’s Deirdre Dunn, who chairs the Treasury Borrowing Advisory Committee, doesn’t believe this was just a temporary anomaly. Barclays strategist Samuel Earl echoed that funding markets are “not out of the woods,” while Curvature Securities’ Scott Skyrm predicts funding pressure will return at least at the next month-end and year-end. Dallas Fed president Lorie Logan suggested the Fed may need to begin buying assets if repo rate increases prove persistent.
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The Fed’s Dilemma
Here’s the thing – the Fed thought they had this under control. They announced they’d stop quantitative tightening on December 1, basically saying “we’re done draining liquidity.” But markets didn’t get the memo. The repo spread still blew out to 2020 levels, which is basically panic territory. And now we’re hearing that the very tool that stabilized things this time – banks using Fed facilities – might not be enough next time.
I mean, think about it. When multiple Wall Street heavyweights and a Fed president are all saying the same thing, you’ve got to pay attention. They’re essentially warning that the financial plumbing is getting clogged again. And this isn’t some minor technical issue – when repo markets seize up, it can ripple through the entire system.
The QT Hangover
So what’s really going on here? Basically, we’re seeing the unintended consequences of three years of quantitative tightening. The Fed’s been pulling money out of the system, and now banks’ reserve cash is dipping into what Dunn calls “not an ample reserve environment anymore.” That’s central banker speak for “we’re running low on cash buffers.”
And it’s not just QT. There’s record Treasury bill issuance happening simultaneously. Big banks that underwrite this debt have to soak up whatever investors don’t buy, then they turn to repo markets to finance these purchases. It’s a perfect storm – less liquidity in the system and more demand for short-term funding. No wonder things are getting tight.
What Happens Now?
The really concerning part? Bank of America’s Meghan Swiber says we might need “a long dormant buyer” – meaning the Fed itself – to step in and buy Treasury bills directly. That would represent a major policy shift. We’d be going from quantitative tightening to what amounts to stealth quantitative easing, all while supposedly fighting inflation.
But here’s my question – if the Fed starts buying assets again, what message does that send? They’ve been trying to normalize policy for years, and now they might need to reverse course because the financial plumbing can’t handle it. It suggests the system is more fragile than anyone wants to admit.
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