What is the likelihood of the Federal Reserve restarting bond purchases and expanding its balance sheet at the critical point of liquidity in the future? On the 7th, New York Fed President Williams suddenly announced that he expects to restart balance sheet expansion soon to meet market liquidity. Of course, he also said that this is a routine operation and cannot be understood as loose. But Dario https://(((((((x.com))))/qinbufark/status/1987117519685959954? S=46&t=k6rimWSEbo2D2TXolYcM-A suggests that no matter how the Federal Reserve packages it, starting to buy bonds in the future will be considered loose, and it will create even bigger bubbles. Let's talk about the possibility of the Federal Reserve restarting bond purchases and expanding its balance sheet in the coming months? First of all, I think the conclusion is highly likely. Let's talk about logic: 1. The current level of liquidity tension It should be said that they were very nervous, to the point where last week the New York Federal Reserve suddenly held an emergency meeting for closed door consultations with major Wall Street banks and executives. The focus of the meeting is on the liquidity pressure in the repo market and how to encourage financial institutions to make more use of the Federal Reserve's permanent repo tool. This is evidence of tight liquidity, otherwise the Federal Reserve wouldn't be so anxious. From the data, the current reserve size of US banks has declined to just over $2.8 trillion, reaching a critical point of abundance but not excess. If there is no concept, look at the top half of the first picture below. The current bank reserve size has returned to the level at the end of 2022. At what time is the end of 2022? That was the time when inflation exploded at the end of 2021, the Federal Reserve raised interest rates at the fastest pace in nearly 40 years, and bank reserves rapidly declined from a peak of $4.2 trillion at the end of 2021 to $2.8 trillion at the end of 2022. The US stock market plummeted and the currency market collapsed. The current level of bank reserve requirements has returned to the level at the end of 2022, no wonder the Federal Reserve is so anxious. And the corresponding US dollar liquidity (as shown in the bottom part of Figure 1) has basically returned to its lowest point in nearly five years at the end of 2022. USD liquidity=Federal Reserve balance sheet - overnight reverse repurchase - Treasury TGA account size=bank reserves+cash in circulation It can be said that the size of bank reserves is the most important component of net US dollar liquidity. Of course, the market is more concerned about US dollar liquidity, while the Federal Reserve is more concerned about the size of bank reserves, as they are closely related to financial stability. 2. Is it effective for the US government to resume normal Treasury TGA spending and for the Federal Reserve to stop reducing its balance sheet? The answer is useful, absolutely useful, but not enough. Normally, the lowest point of bank reserves in the past three years is $2.8 trillion, the highest point is $3.6 trillion, and the median is $3.2 trillion. We need to prevent interbank liquidity shortages and avoid major problems. So the reserve size should at least return to the median of over 3.2 trillion US dollars, with a current shortfall of over 400 billion US dollars. Previously, here was https://((((((x.com)))/qinbufark/status/198887397518805233? We have discussed that the current TGA account of the Ministry of Finance is $960 billion, but the Ministry of Finance's goal is to maintain the TGA account at $850 billion by the end of the first quarter of next year, which can release $110 billion in liquidity. At the same time, there will be new income tax revenue and estimated one or two hundred billion US dollars by the end of the first quarter of next year. All of these, optimistically estimated to release $300 billion in liquidity, but not all of them have been converted into bank reserves. This means that bank reserves need to return to the median level of 3.2 trillion in the past three years, and there will be an additional shortfall of nearly 200 billion US dollars. This gap requires support from the Federal Reserve, and yesterday's tweet talked about why the New York Fed held an emergency meeting. On the one hand, liquidity is indeed tight, and on the other hand, banks dare not casually use their standing repo facility SRF. Once you use it, the market will think that your institution is problematic. If banking institutions don't move, then the Federal Reserve needs to move. From this perspective, former New York Fed President Williams said that it is imperative to restart the expansion of the balance sheet soon, although he always said that this is just a technical operation. 3. The increase in bank reserve size and the return of liquidity can indeed be expected Figure 2 shows the changes in the TGA account of the Ministry of Finance, overnight reverse repurchase, and changes in bank reserves, which clearly demonstrate how the Federal Reserve's interest rate hikes and balance sheet reductions since the beginning of 2023 have affected the size of bank reserves, and thus the net liquidity of the US dollar. Overnight reverse repos have continued to decline from a peak of $2.5 trillion to nearly several billion dollars today. On the one hand, they serve as a buffer for bank reserves, preventing them from being significantly depleted in the face of the continued issuance of bonds by the Ministry of Finance. At the same time, the periodic expenditure of the fiscal TGA account has played a role in supplementing liquidity. If you carefully compare, in the past three or even five years, the trend of assets highly related to loose policies has been very frequent with changes in bank reserve sizes. We have talked about this here before: https://(((((x.com)))/qinbank/status/1835479956727755139? s=46&t=k6rimWsEbo2D2tXolYcM-A。 Have you talked about https://((((((x.com))))/qinbafrank/status/197900690724451578 in mid October? S=46&t=k6rimWSEbo2D2TXolYcM-A Since October, liquidity has been tight due to this logic: in August and September, excess bond issuances to replenish TGA consumed the amount of overnight reverse repos, and the government shut down the TGA account funds of the Ministry of Finance in October, causing the reserve size of commercial banks to continue to decline and liquidity to become tight. The current market downturn adjustment is also very pessimistic, with various opinions. I also see that there are claims that both Fed put and Trump put have become invalid, but the key is that they haven't taken action yet. It's a bit too early to say so. Personally speaking, the core is: Firstly, pay attention to whether there are any issues with the fundamentals of the US stock market and the AI mainline, whether there are major problems with the industry fundamentals or minor problems in certain areas; Secondly, pay attention to the Federal Reserve's easing measures and market expectations of easing; Pay attention again to the overall liquidity situation. When liquidity is tight, various tricks will happen, and pessimistic statements will also appear. It depends on whether there is a possibility of liquidity returning, when it can return, and to what extent it will return. The second point here is related to interest rates and the price of currency. The third point is related to the quantity of currency. Market liquidity is a topic that individuals continue to pay attention to: 1) In August 2022, we discussed the definition and impact of US dollar liquidity: https://(((((((x.com))))/qinbank/status/1562723843873337344? s=46&t=k6rimWsEbo2D2tXolYcM-A 2) Mid December 2023 discussion on the reasons for the loose liquidity at that time and the potential risk of liquidity shock at the end of the first quarter of 2024 https://((((((((x.com))))))))/qinbafrank/status/1736780478043045934? s=46&t=k6rimWsEbo2D2tXolYcM-A 3) The relationship between the TGA account of the Ministry of Finance and the liquidity of the US dollar in May 24: https://(((((((x.com))))/qinbafrank/status/1792856993948148136? s=46&t=k6rimWsEbo2D2tXolYcM-A 4) Have you dissected the relationship between Bitcoin trends and US dollar liquidity in September 2024? Https://((((((((((x.com)))))/qinbank/status/1831275869892035? s=46&t=k6rimWsEbo2D2tXolYcM-A This article is sponsored by the meme trading tool http://(xxyy. io) | Fast trading, versatile features, and can be used to monitor on chain wallets @useXXYYio