Monetary Plumbing and Liquidity Update
Mapping out what a post-QT and post-BTFP world is going to look like
Mapping the route out of QT and into an ample reserve regime
As the Fed continues its QT program of removing bank reserves from the system to return to what it deems as being an “ample reserve regime”, the Fed is now beginning to discuss what a post-QT world will look like, as well as what a QT taper may look like.
It is now well agreed upon that most Fed governors measure total system reserves as a combination of Fed bank reserves + Reverse Repo Facility Balances. The combination of the two provides us this chart of a total system reserve $ value of $4.07T.
As far as we know, the Fed targets approximately a floor of 10-12% of GDP as an ideal level for reserves within the system. Aside from that, the other best signals we have for knowing when we reach an equilibrium level of reserves is an uptick in SOFR-IORB spread, which would hint at a beginning shortage of collateral in the system:
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