The Fed's liquidity buffer has been depleted.
The Reverse Repo balance has collapsed from a peak of over $2 trillion down to nearly zero.
In 2023, the RRP was large enough to cushion the TGA refill by absorbing the amount of Treasury bonds issued instead of depleting bank reserves. Now that the RRP has hit rock bottom, that buffer is no longer there.
Any future issuance of Treasury bonds or TGA rebuilding will have to come directly from bank reserves. The Fed has only two options: let reserves gradually decline and face the risk of another repo explosion, or expand the balance sheet to provide direct liquidity.
Given the severity of 2019, the second path is much more likely. This means the Fed will shift from withdrawing liquidity to pumping liquidity back into the market, a significant turnaround compared to the last two years.
Combined with the end of QT and the TGA preparing to decline, marginal liquidity is shifting to a positive net state for the first time since early 2022. A key selling pressure on crypto may be gradually fading.
Delphi Digital
