Good evening.

I’ve been getting a lot of questions re: The Fed and QT.

Going to make this as simple as possible for everyone.

The Reverse Repo (RRF) is basically a slush fund where excess cash has been parked since QE 2020.

The Treasury has been using the RRF to fund its needs by issuing short term T-Bills.

The RRF is down to $500B from a peak of $2.5T.

When the RRF is drained, the Treasury needs to find new capital. It will do this by issuing longer dated Treasuries.

This will cause the banks to use their reserves.

There are currently $3.5T in bank reserves.

When bank reserves drop to $2.5T the Fed and Treasury get nervous.

Why?

Because they worry about another liquidity crisis like Sept 2019 when the overnight rates spiked when banks basically ran out of liquidity at the same time that the Treasury issued a pile of unexpected debt.

There are a number of reasons for this I won’t go into.

And so, when the RRF is drained or near drained, the Fed slows QT (selling the bonds they bought in 2020-2021 to add liquidity in the markets. This is also what helped create the excess slush fund of RRF).

And then, when the reserves hit $2.5T, QT ends.

Why?

The Fed cannot compete with the Treasury for liquidity at that point.

Because the last thing the Treasury can have is disfunction in a Treasury auction.

And so, QT ends.

And the next step will be?

QE.

More cowbell. More. slush fund.

Wheee.

Hope this helps. Have a great night.