Will The Fed End QT Soon? The Fed's Reverse Repo Facility Is At Its Lowest Level Since June 2021
The Fed may be poised to end QT soon. Very soon.
We recently wrote that the overnight reverse repo market may offer clues as to when the Fed may end Quantitative Tightening (QT). Banks and non-bank institutions use the Fed’s overnight reverse repo facility (ON RRP) as a short-term tool to earn a return on excess capital.
On Friday December 15th, that excess capital as measured by the ON RRP balance was at its lowest level since June 16th 2021, signifying that there is less liquidity in the economy versus a month ago, several months ago, a year ago, etc. Friday’s ON RRP balance stood at $683 billion, down from a high of $2.6 Trillion on December 30th, 2022. At the current pace of draw down the ON RRP facility may find itself with a zero balance sometime in January 2024. Then what? The Fed may end its QT effort very soon.
I believe that if the Fed were to halt QT tomorrow and take its Fed Funds rate to zero, the U.S. economy will continue to soften so long as prices of goods and services remain elevated. Get ready for a round of headcount cuts in January as we approach Q4 earnings calls.