Signs of funding strain are emerging in US money markets as banks turn to Federal Reserve facilities at levels not seen since the pandemic era.
The Fed’s Standing Repo Facility (SRF), a backstop that allows banks to borrow short-term cash in exchange for Treasuries, was tapped for roughly $50bn on Friday, the highest since the program’s creation in 2021. The surge underscores how liquidity is tightening as the Fed’s reserves hover near the lower boundary of what officials describe as 'ample.'
For now, the stress appears technical rather than systemic, driven mainly by month-end pressures and the ongoing US government shutdown, which has lifted the Treasury General Account (TGA) and effectively pulled cash out of the banking system. Because the TGA cannot disburse funds during the shutdown, liquidity remains locked at the Fed instead of circulating through markets.
The Fed’s Reverse Repo Facility (RRP) absorbed another $30bn on Friday, further draining cash as banks and money-market funds lent overnight to the central bank. The combined effect has magnified a short-term squeeze, forcing some institutions to rely on Fed facilities rather than private funding channels, which remain constrained.
Quiet end to QT
The Fed’s decision last week to end quantitative tightening (QT) acknowledged those liquidity strains. By halting balance-sheet reductions, Fed policymakers are delivering a subtle easing without the fanfare of a rate cut, an approach some analysts have dubbed 'Not-QE QE.'
QE, short for quantitative easing, refers to the central bank’s expansion of monetary policy through large-scale asset purchases. Chair Jerome Powell signaled last week that a December rate cut is not guaranteed.
Liquidity is expected to recover in the coming weeks as month-end effects unwind and Treasury spending resumes once the shutdown ends. Still, the episode highlights how fragile reserve balances have become, reinforcing expectations that the Fed will eventually expand its balance sheet again through 2026 to maintain stability and accommodate widening fiscal deficits.
“Our long-stated plan has been to stop balance-sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions,” Powell said after last week’s policy meeting. “Signs have clearly emerged that we have reached that standard in money markets.”
Crypto correlation
Bitcoin extended its October losses, trading near $107,400 on Monday, according to CoinMarketCap. The cryptocurrency has tracked the broader cautious mood following President Trump’s threat of 100% tariffs on Chinese imports and Powell’s reluctant stance on potential December easing.
Trade tensions between Washington and Beijing have been cast as the main culprit for Bitcoin’s October decline. Yet, a trade accord between the two powers in South Korea last week did little to buoy crypto markets, suggesting traders are focused squarely on liquidity.
Analysts view the current cash squeeze as a likely peak in tightness before year-end, setting up conditions for a rebound as reserves rise. XRP, which has historically rallied during periods of Fed balance-sheet expansion, has so far shown little reaction. Traders are watching whether a sustained return of liquidity revives that pattern in the weeks ahead for the altcoin.
