Interest Rates Spike Rarely! Is a "Money Crunch" Emerging in the US?

Although the Federal Reserve has formally announced it will end Quantitative Tightening (QT), the funding conditions in the US financial system have continued to deteriorate even after last week's Fed decision, as measured by repo market indicators such as the Secured Overnight Financing Rate (SOFR) and General Collateral (GC) repo rates, as well as the usage of the Fed's Standing Repo Facility (SRF)...

Many had expected liquidity to stabilize after the month-end, as banks traditionally engage in window dressing and absorb liquidity at that time, but this has not been the case.

Conversely, observations from some market participants that "delaying the end of balance sheet runoff until December might be Powell and the Fed's latest policy misstep" seem to be bearing out. In last week's policy meeting, while the Fed did announce the end of QT as the market expected, the timing was not November 1st as some had speculated; instead, they decided to wait a full month until December 1st.

The problem is: Last Friday, the usage of the Fed's primary liquidity support tool – the Standing Repo Facility (SRF) – hit a record $50.35 billion, driven primarily by month-end factors (where some institutions scale back lending and related activities). In theory, SRF demand should have declined this Monday – and it did – but the drop was far less than what would be consistent with normalization in the repo market.

As the chart below shows, on Monday the Fed again lent a total of $22 billion to eligible financial institutions through the Standing Repo Facility. Although lower than last Friday's anomalous peak, this still marks the second-highest level since the facility was made permanent. This tool was launched in 2021 to provide quick loans using Treasury or mortgage-backed securities as collateral.