Investors should pay attention to the signals from the November FOMC meeting and the Treasury's debt issuance plan to grasp the turning point.
Source: Zhou Ziheng
Introduction: Sudden Events Reveal Systemic Concerns
On November 12, 2025, during the Federal Reserve's annual Treasury market conference, the New York Fed suddenly convened an emergency meeting without prior public notice, engaging in closed-door discussions with major Wall Street banks and executives. The focus of the meeting was on the liquidity pressures in the repo market and how to encourage financial institutions to utilize the Fed's Standing Repo Facility (SRF) more. This event was exclusively reported by the Financial Times on the evening of November 15, quickly drawing market attention. The report indicated that the meeting was a temporary arrangement aimed at alleviating stress signals in the "pipeline" of the U.S. financial system, with no prior public warning.
This sudden event is not isolated but rather a concentrated reflection of the long-standing challenges in liquidity management within the U.S. financial system. Since 2022, the Federal Reserve has been implementing Quantitative Tightening (QT) to gradually reduce its balance sheet size in response to inflationary pressures. However, this policy began to show side effects in the second half of 2025: a reduction in bank reserves, increased volatility in repo rates, and even signs that the Fed's control over short-term funding pricing is weakening. As of November 17, 2025, market data indicated that the secured overnight financing rate (SOFR) had repeatedly hit or exceeded the upper limit set by the Fed, and the federal funds rate was also on an upward trend.
This article will analyze the causes, manifestations, historical comparisons, and potential impacts of this liquidity tension based on the latest data. By objectively sorting through key elements such as the dynamics of the Fed's balance sheet, changes in the Treasury General Account (TGA), and repo market indicators, it reveals the structural vulnerabilities of the U.S. financial system. Data sources include official reports from the Federal Reserve, releases from the New York Fed, and reliable financial media, as of November 17, 2025.
Roots of Liquidity Tension: Multiple Pressures from Quantitative Tightening
The liquidity management of the U.S. financial system relies on the Federal Reserve's monetary policy toolkit, with Quantitative Tightening being the core driving factor of current pressures. Since initiating QT in June 2022, the Fed has passively reduced its balance sheet by approximately $95 billion per month, primarily involving the maturity of U.S. Treasuries and mortgage-backed securities (MBS) without reinvestment. As of November 12, 2025, the Fed's total assets had decreased from a peak of about $9 trillion to approximately $7.2 trillion, with Treasury holdings at $4.193 trillion. This reduction equates to the withdrawal of about $1.8 trillion in liquidity from the system, directly reducing bank reserve levels—bank reserves are a core component of the monetary base.
At the same time, the role of the Reverse Repurchase Agreement Facility (RRP) as a liquidity "shock absorber" is weakening. The RRP allows institutions like money market funds to lend excess funds to the Fed temporarily to earn stable returns. During the period of Quantitative Easing (QE), the RRP balance peaked at $2.55 trillion in December 2021, absorbing excess liquidity in the system. However, as QT progressed, the RRP balance has continued to decline. As of November 12, 2025, the RRP balance was approximately $1.82 trillion, down about 13% from $2.1 trillion in July 2025. This decline reflects a reduction in excess funds within the system: institutions no longer have sufficient idle cash to inject into the RRP and are instead seeking higher-yield investments.
Further exacerbating the pressure is the rapid expansion of the Treasury General Account (TGA). The TGA is the U.S. Treasury's "checking account," with funds primarily sourced from taxes, debt issuance, and transfers from the Fed's accounts. In the first half of 2025, the TGA balance rose from about $364 billion in July to $940 billion by November 12. This net increase of approximately $576 billion directly withdrew an equivalent amount of reserves from the banking system, as funds from Treasury debt issuance first enter the TGA, reducing liquidity in the private sector. For the fiscal year 2025 (ending in October), the average TGA balance reached $850 billion, a 28% increase compared to the same period last year.
The U.S. government's massive deficit further amplifies this effect. The federal deficit for fiscal year 2025 is projected to reach $1.78 trillion, accounting for about 6.5% of GDP, significantly higher than pre-pandemic levels. To finance the deficit, the Treasury needs to issue about $2.3 trillion in new debt (including short-term Treasury bills and long-term bonds), which not only raises the TGA balance but also increases market demand for Treasuries. In the fourth quarter of 2025, the Treasury is expected to borrow $590 billion, with a cash balance target of $850 billion. These combined factors have led to a decline in bank reserves from about $3.2 trillion at the end of 2024 to approximately $2.9 trillion in November 2025, with the reserve-to-GDP ratio dropping from 12% to 10.5%.
The original intention of Quantitative Tightening was to achieve a smooth transition under the "Ample Reserves" framework, where reserve levels are sufficient to maintain low volatility in the funding market but not excessive enough to trigger inflation. However, data from 2025 indicates that this framework is under pressure: the reduction in reserves directly raises funding costs, similar to how a declining water level in a reservoir begins to exert pressure on the supply pipes.
Warning Signals from Interest Rate Indicators: SOFR and Federal Funds Rate on the Rise
The most direct manifestation of liquidity tension is the abnormal volatility in short-term interest rates. SOFR, as the benchmark interest rate for the $3.1 trillion repo market, measures the cost of overnight borrowing collateralized by Treasuries. The Fed regulates SOFR by setting an interest rate corridor: the lower limit is the RRP rate (currently 3.80%), and the upper limit is the SRF rate (4.00%). Under normal circumstances, SOFR should fluctuate within this corridor.
However, since October 2025, SOFR has repeatedly hit or exceeded the upper limit. On November 14, SOFR closed at 4.25%, up 27 basis points (bp) from the average of 3.98% in October, and has remained above 4.00% for six consecutive trading days. This increase is not a seasonal fluctuation (such as the quarterly tax peak) but rather a persistent pressure: the 10-day moving average SOFR-RRP spread widened from 5bp to 15bp, indicating that cash suppliers are beginning to raise pricing.
Similarly, the Effective Federal Funds Rate (EFFR)—the benchmark for unsecured overnight interbank lending—also shows signs of tightening. In October 2025, the EFFR averaged 4.09%, dropping to 3.86% in early November (reflecting the Fed's 25bp rate cut on October 29, with a target range of 3.75%-4.00%). However, on November 12, the EFFR rose to 3.98%, just 2bp below the upper limit, and 18bp higher than the RRP. This contrasts with the first half of 2025, when the EFFR stabilized at a median of 4.33%, indicating a weakening of the Fed's control over the unsecured market.
The common upward trend in these indicators stems from a supply-demand imbalance: when reserves are scarce, cash-rich institutions (such as a few large banks) can dominate pricing, pushing interest rates toward the upper limit. Data from the New York Fed shows that since September 2025, the average daily trading volume in the repo market has increased from $1.2 trillion to $1.4 trillion, with hedge fund borrowing surging to $3 trillion. Additionally, the basis trade—hedge funds leveraging the futures-spot price differential—has reached $1.8 trillion, primarily financed through repos. When repo costs rise, such high-leverage trades (with leverage ratios of 50:1 to 100:1) face margin call pressures, further amplifying market volatility.
Historical Reflection: The Risk of Repeating the 2019 Repo Crisis
The current situation closely resembles the repo crisis of September 2019. At that time, the Fed was nearing the end of QT, with bank reserves dropping from $2.3 trillion to $1.4 trillion, and the TGA rising from $500 billion to $700 billion. As a result, SOFR spiked to 10% (900bp higher than the EFFR), forcing the Fed to inject liquidity urgently and restart QE.
The similarities in 2025 are evident: QT has led to a similar decline in reserves (about $300 billion), the TGA has expanded comparably (about $600 billion), and the RRP has fallen by 30% from its peak. The difference is that the current inflation rate is 2.8% (November data), lower than the 2.0% in 2019, but the deficit is larger (7% GDP vs. 4.6%). If pressures persist, the market may experience a repeat of "lightning" liquidity exhaustion, especially at quarter-end (such as the December tax date).
However, the Fed has learned from past lessons: in 2021, it introduced the SRF as a permanent backup tool to reduce stigma (the sense of shame in using it). Yet, data from 2025 shows that the SRF usage rate remains low: it peaked at $50.35 billion on October 31, with an average of only $20 billion in November, far below the intervention scale of hundreds of billions in 2019. This reflects institutions' hesitation to use the SRF: on one hand, there are concerns about signaling effects (using it would acknowledge liquidity shortages), and on the other hand, the interest rate cap (4.00%) is insufficient to attract active borrowing.
Statements from Fed Officials and the Emergency Meeting: Signals of Policy Shift
Recently, senior officials at the Federal Reserve have been vocal, suggesting that liquidity management needs adjustment. On October 14, 2025, Chairman Jerome Powell noted in an economic outlook speech, "Liquidity conditions are beginning to tighten gradually, and repo rates are generally rising." He emphasized that the QT process may be nearing its end, with reserve levels shifting from "ample" to "adequate."
Dallas Fed President Lorie Logan stated on October 31 that repo rate volatility has led to a gradual rise in the federal funds rate, and although daily fluctuations are severe, the overall trend cannot be ignored. She suggested that if pressures persist, consideration should be given to resuming asset purchases to stabilize the market. On the same day, the Fed announced a 25bp rate cut, but Logan opposed it, arguing that inflation remains high (core PCE at 2.6%).
Roberto Perli, manager of the New York Fed's System Open Market Account (SOMA), stated on November 12, "Reserves are no longer ample." At the annual Treasury meeting, he pointed out that the widening SOFR spread and increased SRF usage are clear evidence of reserve scarcity, and he expects the Fed "will not have to wait too long" to shift to asset purchases.
The culmination of these statements was the emergency meeting on November 12. New York Fed President John Williams discussed feedback on SRF usage with 24 primary dealers. The meeting emphasized eliminating stigma and encouraging institutions to actively borrow SRF funds during repo pressures. Bloomberg reported that dealers warned that without increased intervention, the $12 trillion repo market could face greater volatility. The next day, the New York Fed released charts showing hedge fund repo borrowing reached $3 trillion, a 15% increase since September.
This series of actions indicates that the Fed is shifting from "observation" to "intervention," but is avoiding publicly acknowledging a crisis to prevent market panic.
Potential Risks and Market Chain Reactions
If liquidity tension escalates, it could trigger a domino effect. First, the repo market is the foundation for Treasury pricing, and high costs will push up long-term yields: on November 17, the 10-year Treasury yield rose to 4.35%, up 20bp from the October peak. Second, leveraged trading amplifies risks: of the $1.8 trillion in basis trades, about 70% is financed through repos. If SOFR remains above 4.00%, hedge funds may be forced to liquidate positions, leading to a sell-off in Treasuries.
The equity market has already shown volatility: the S&P 500 index has fallen 2.5% since November, with tech stocks leading the decline due to liquidity concerns. The U.S. dollar index (DXY) has risen to 105, reflecting safe-haven demand. The bond market basis has widened, with the futures-spot spread reaching 15bp.
More broadly, tightening interbank lending may transmit to the credit market: small and medium-sized enterprise loan rates have risen to 6.2%, and consumer spending is slowing. Internationally, there is capital outflow from emerging markets, and if the Fed resumes QE, it will further distort global liquidity.
To mitigate risks, the Fed could: (1) slow the pace of QT, reducing the monthly cap to $50 billion; (2) expand the SRF cap or reduce stigma; (3) temporarily inject reserves, similar to operations in 2019. In extreme scenarios, restarting QE could inject hundreds of billions, but given inflation at 3.0%, this could create a policy dilemma.
Conclusion: Balancing Tightening and Stability in Policy Choices
The liquidity tension in the U.S. financial system stems from the combined effects of QT, TGA expansion, and deficit financing, with the rise in SOFR and EFFR serving as warning signals. The Fed's emergency meeting marks a policy turning point: shifting from tightening to fine-tuning to maintain market stability. Historical experience shows that timely intervention can prevent crises, but the current environment is more complex—under high debt and high inflation, any stimulus must be approached with caution.
Looking ahead, the market needs to closely monitor reserve levels (targeting $2.5-3 trillion), SOFR spreads (alert at 20bp), and SRF usage (exceeding $50 billion). If pressures ease, QT may conclude smoothly; conversely, restarting QE may become inevitable. This not only tests the Fed's operational capabilities but also concerns global financial resilience. Investors should pay attention to the signals from the November FOMC meeting and the Treasury's debt issuance plan to grasp the turning point.
Data in this article is as of November 17, 2025, sourced from the Federal Reserve H.4.1 report, New York Fed SOFR releases, and financial media.
References:
Federal Reserve H.4.1, Nov 13, 2025.
New York Fed SOFR Data, Nov 14, 2025.
FT Article, Nov 15, 2025.
Bloomberg Funding Market Report, Nov 13, 2025.
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