Liquidity

Last Update: 24/02/2023

Current data and trends:

FED balance sheet

More details: FED Balance Sheet

After the banking developments the FED balance sheet increase again, eliminating almost 2/3 of the previous decline. However is important to point out, that the liquidity given by the FED was for emergency loans, and no for asses purchases as traditional QE.

• As of April 4, 2023 the balance stands at $8,705 trillions. The decline for the peak is now only $250 billion.
• Emergency Loan has increased to over $300 billion at the end of march, from almost zero at the beginning.

Reverse Repo

The Fed’s overnight repo and reverse repo facility (ON RP/RRP) allows MMFs to borrow from or lend to the Fed, using government securities as collateral and agreeing to buy or sell back those securities at agreed rates on an overnight basis. They enjoy practically zero counterparty risk and use top quality government securities as collateral at remunerative rates.

The ON RRP facility has attracted a record amount of cash after enjoying growing daily transaction volume since mid-2021.

Its important to monitor it, because if the FED decided to lower the interest rate it pays, this could cause the reverse repo to drain since investors could decide to look for other assets for return. This could inject a lot of liquidity to bank reserves and markets.

• The reserve repo has been stable at about 2 trillion dollars since last year.
• Recently, has been drained by about 200 billion, this could help explain the stabilization of bank reserves and the easing of financial conditions in recent months. If the current appetite for more risky assest continue, the draning of the RRP could also continue in coming months.

Treasury TGA

The Treasury General Account (TGA) is an account held by the U.S. Department of the Treasury at the Federal Reserve Bank, into which all federal receipts are deposited and from which all federal payments are made. The TGA is essentially the checking account of the U.S. government, and it serves as a key tool for managing the government's daily cash flows.

The TGA balance can fluctuate significantly over time, depending on a range of factors, such as the timing of tax collections and government spending. In recent years, the TGA has received increased attention as a result of debates around the federal debt ceiling, which can impact the government's ability to borrow funds and, thus its cash balances in the TGA.

• TGA currently has $490 billion, it has come down almost $500 billion since mid-2022.
• Due to the debt limit not yet being solved in the US, the TGA is expected to continue declining in the short term. Adding liquidity to reserves and markets.

Bank Reserves

The correlation between the stock market and bank reserves has been closely follow since it suggests the sock market follows the movement of reserves.

• As an effect of QT, Bank reserves are also declining, they stand at 3.1 Trillions, it has declined$ trillion since November 2021, a 25% decline.
• It has been stable the last 3 months at $3 trillions, which could explain some of the financial easing that we saw in January 2023
• Bank reserves are still above the pre-pandemic level

M2

Item	Amount as of 2/27/2023
Currency	2,211.70
Demand deposits	5,066.50
Other liquid deposits	12,407.60
Small- denomination time deposits	361.4
Retail money market funds	1,160.20
M2	21,207.40

M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. \

M2 is closely tied to economic growth, as an increase in the money supply can stimulate spending and investment. And also as an increase in the money supply can lead to higher prices. Recently it has also been important to understand financial conditions, as the exponential growth in M2 helped with the asset inflation we saw in the last decade.

• M2 has decline only a 2.5% since it all time high
• M2 had negative Y/Y growth at 1.31% in december 2022 for the first time since the data is collected
• M2 velocity is still at low levels (1.226), which could explain the limited effect the movements in M2 has had in the real economy, contrary to the financial markets

Bank Deposits

Deposits are a critical source of funding for banks, which use the money to make loans and investments. By accepting deposits, banks are able to create credit and provide funding to borrowers, which helps to stimulate economic activity.

• Deposits have decline 485 billion since April 2022, currently stands at a level of 17.6 trillions, it has been 2.67% decline.
• Y/Y growth is -2% as of february
• Reasons that could help explain this decline are:

Assestment:

Currently sata shows liquidity forces that are working opposite to each other:

• The FED QT trying to remove liquidity from the market throug it balance sheet reduction
• The tresuary TGA draning due to the debt limit adding liquidity to the market
• RRP has ramain mostly stable, but has added 200 B to the market recently.

Even though we are already seeing the effect of QT in bank reserves, M2 and bank deposits, the effect until now has been limited, for the reasons listed above. We expect the TGA issues to be resolve in the coming months, and the tailwind to liquidity to end, especially with treasury start to issue debt again and build the TGA account again, this will remove liquidity from the markets at a double pace (QT and TGA building). This will have a negative effect on:

• Financial markets
• Inflation
• Economic Growth

Until then, the stabilization of financial contiditions will most likely continue for a few more months.