America's massive leverage summarized in one chart
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Powell may have floated the idea of a pause, but the cooling U.S. labor market tells a different story — and it’s opening the door to lower policy rates. Here’s the twist: Inflation is holding around 3.0%, dipped to 2.3%, and is averaging 2.7% for the year. GDP? Still strong. Demographics? Warping the job market. And yet… rate cuts are coming. Why? Because the other half of the Fed’s mandate is screaming for it. Lower rates conveniently support: Debt sustainability Financial-sector stability Liquidity across the system Central banks want lower rates — and their messaging shows it. That’s why we’re hearing nonstop about financial-sector risks, bond-market volatility, and liquidity needs… and far less about headline inflation.
This is the 2nd largest liquidity injection since Covid and surpasses even the peak of the Dot Com Bubble Source. Barchart
After months of draining liquidity and a one-month delay that tightened markets, the Fed’s quantitative tightening officially ends today. Here’s what Wall Street is watching: 💧 Reserves Are Scraping Bottom Fed reserves hit a low in October, but should end 2025 around $2.9T - still uncomfortably close to “not enough.” Repo markets have already shown stress, with Standing Repo Facility usage hitting its 2nd-highest level since COVID. 🏦 Goldman’s Call: QT Ends, Balance Sheet Growth Returns Fast Goldman expects the Fed to start buying ~$20B/month in T-bills starting Jan 2026, plus reinvesting MBS runoff - together adding ~$40B/month back into the system. Reserves could climb back above $3T by late 2026. 💣 Why the Pivot? Liquidity Is Too Tight Repo rates (TGCR, SOFR) are trading well above where they “should” be. Funding markets keep flashing red. The Fed is quietly preparing to reflood the pipes. 📈 Treasury Supply Stays Heavy - But the Fed Becomes a Buyer Again With massive deficits ahead, Treasury issuance remains huge. But thanks to the shift in policy: Fed is expected to absorb ~$480B of next year’s T-bill issuance Non-Fed buyers only take ~$390B — the lowest since 2023 🍃 But There’s a Catch… The Fed will let $2T of MBS roll off, pushing a wave of mortgage-backed supply into markets. That means: ➡️ More pressure on housing and mortgage rates ➡️ A slow-motion shift from MBS → Treasuries in the system ⚠️ Bottom Line: QT ends today, but the liquidity story is far from over. Funding markets are strained, repo is volatile, MBS supply is surging - and the Fed may be forced to restart balance sheet expansion faster than anyone expected. The next big test? April tax season. If liquidity cracks again, the Fed’s “reserve management purchases” may turn into something much bigger. Source: Goldman Sachs, zerohedge