When the central bank starts playing word games, the market should take notice: this is not an ordinary year-end settlement, but a liquidity change that will soon affect every investor.
In the early hours of today, the Federal Reserve once again injected about $6.8 billion into the market through repurchase agreements, which has already totaled $38 billion in liquidity injections over the past 10 days. The official explanation is that this is merely a technical operation to address year-end funding needs, and certainly not quantitative easing.
However, as someone who has experienced multiple market cycles, I sense something different. When the Federal Reserve needs to 'temporarily replenish' the market so intensively, the thirst of the financial system may far exceed our imagination.
01 Repo operations: The Federal Reserve's 'temporary bandaid'
Let's first break down this seemingly dull operating mechanism. A repurchase agreement (Repo) is essentially a short-term pawn transaction between the Federal Reserve and banks.
Banks 'pawn' high-quality collateral such as government bonds to the Federal Reserve in exchange for cash to get through difficulties; one or two days later, banks redeem government bonds with principal and interest. It's like you pawn your gaming console to a friend for some cash for a weekend party, then buy it back on Monday, except the scale of this transaction with the Federal Reserve is in the billions.
The Federal Reserve openly states that this is to meet the peak demand for year-end funding and ensure the smooth operation of the banking system. But the devil is in the details: the usage of the Standing Repo Facility (SRF) surged to $26 billion on December 1, marking the second-highest level since 2020.
When financial institutions need to frequently 'ask for help' from the central bank, it indicates that the internal dollar supply-demand balance in the market has already encountered problems.
02 Liquidity Alert: These signals can no longer be hidden
I have organized several key signals, all pointing to one fact: liquidity pressure in the financial system is intensifying:
Bank reserves have fallen below a critical psychological barrier. The scale of reserves in the U.S. banking system has fallen below $3 trillion, a level that many Federal Reserve officials view as the watershed between 'ample' and 'tight'.
Short-term interest rates have repeatedly breached the policy range. Important overnight rates in the repo market, such as the Secured Overnight Financing Rate (SOFR), have recently frequently exceeded the upper limit of the Fed’s policy rate corridor. This is akin to the unstable water pressure in a home, fluctuating indicates that reserves within the banking system are sliding from 'ample' to 'sufficient', with a risk of further moving toward 'scarce'.
The Federal Reserve itself is preparing a 'Plan B'. The New York Fed plans to normalize 'early repo' operations, akin to preparing lifeboats in advance, indicating they know there might be a leak on the ship.
03 Not QE, better than QE? The Federal Reserve's tough balancing act
The Federal Reserve emphasizes that these operations are fundamentally different from quantitative easing (QE). Technically, they are correct: QE primarily buys long-term government bonds to stimulate the economy; whereas current operations mainly purchase short-term government bonds aimed at maintaining normal market operation.
But when I see a monthly purchase scale of $40 billion, I can't help but think of former New York Fed expert Mark Cabana's prediction: The Federal Reserve may start a plan to buy $45 billion in short-term Treasury bills each month. This scale of liquidity injection, regardless of what it is called, will stir waves in the financial system.
More subtly, the Federal Reserve is in an awkward position of pouring water with one hand while siphoning it with the other: injecting short-term liquidity through repo operations while still executing the long-term balance sheet reduction plan of quantitative tightening (QT). This policy contradiction exposes their dilemma: worried about inflation rebound, yet fearful of market collapse.
04 Impact on the cryptocurrency market: Undercurrents are about to emerge
As a veteran of the crypto market, I am acutely aware of how changes in liquidity in the traditional financial world can impact our market. Here are several key impact pathways:
The indirect benefits brought by the decline in dollar costs. Although these operations do not directly target cryptocurrencies, after financial institutions obtain cheaper funds, some hot money may flow into high-risk assets. Historical data shows that during periods of liquidity easing, the correlation between Bitcoin and traditional assets tends to rise in the short term.
The warming of market risk appetite. The Federal Reserve injecting liquidity into the market will enhance investors' risk appetite. When short-term interest rates are controlled, investors are more willing to take risks, which is a positive signal for highly volatile cryptocurrencies.
The appeal of Bitcoin as an alternative asset. Currently, the cryptocurrency fear and greed index is only at 25, and the market is still in a state of 'extreme fear'. However, this extreme sentiment often coincides with market bottom regions. Once liquidity in traditional markets improves, the cryptocurrency market may see a strong rebound.
According to analysts, Bitcoin is testing a mid-term resistance level of $89,000. If it successfully breaks through, it may surge to $91,000-$93,500. An improving liquidity environment could be the catalyst for this breakout.
As the year-end liquidity tightening phase passes, will these 'temporary' operations of the Federal Reserve become the norm? I believe the possibility is very high. Fed Chairman Powell has already hinted that quantitative tightening (QT) may be nearing its end.
Liquidity never lies; it only quietly shifts. When the Federal Reserve begins to frequently use repo tools, when bank reserves fall below critical levels, and when short-term interest rates fluctuate frequently, these signs tell us that the underlying structure of the financial system is changing.
Friends, remember a saying: 'Do not fight the Federal Reserve.' Regardless of whether they call these operations 'technical' or 'temporary', the direction of liquidity has quietly shifted. Pay attention to whether Bitcoin can break through the key resistance level of $89,000, as this may be the best vote from the market on liquidity changes.
(The above content is only personal opinion and does not constitute investment advice. The market has risks, and investment should be cautious.)
P.S. Want to learn more about the relationship between liquidity indicators and the cryptocurrency market? Like and follow, in the next issue, I will share how to track the 'real' changes in the Federal Reserve's balance sheet not by looking at headline news, but by examining the buried data.
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