Everyone's waiting for a rate cut. But the Fed has already made its big money move.

MW Everyone's waiting for a rate cut. But the Fed has already made its big money move.

By Charlie Garcia

If another 2019-style liquidity crunch hits the economy, your money-market fund will be the first domino

The Federal Reserve has ended its quantitative-tightening policy. It's time to take a closer look at where you're stashing your cash.

The Federal Reserve ended quantitative tightening on Dec. 1. Not because everything is fine, but because the money pipes are clogged and someone finally smelled gas.

QT was the Fed shrinking its balance sheet by letting bonds die of old age without replacing them. They launched it in 2022 to drain the COVID-19 pandemic's whiskey binge from the financial bloodstream. Noble goal. Except now reserves have dropped to the point where one more month of this virtue might crack something in the funding markets.

The Fed's overnight reverse repo facility once held about $2.5 trillion in spare cash, like a giant mattress stuffed with money nobody needed yet. That mattress is empty. The cash migrated into your money-market fund, which means you are now the mattress.

Why stop now? Fed Chair Jerome Powell mumbled something about "ample reserves" and pointed back to 2019, when the repo market seized up overnight and forced the Fed to rush in with emergency cash. Translation from the original Fedspeak: The engine is making sounds that remind us of expensive repairs.

The motel closed at midnight

The Fed's shock absorber is gone. No cushion. Just friction.

The overnight reverse repo facility is a mouthful of bureaucratic nothing that describes something important: the Fed's overflow tank for Wall Street's cash.

Money-market funds with spare billions could park cash at the Fed overnight in exchange for Treasurys and a little interest. Clean, safe. The Fed managed liquidity. Wall Street earned basis points while sleeping.

At the peak in 2022, that tank held about $2.5 trillion. A luxury motel for cash with nowhere else to go.

As of this fall, occupancy is nearly zero - roughly $20 billion to $30 billion on a good day. The New York Fed's manager called it a night.

This is being sold as "normalization." That is what bureaucrats say when nothing else works. The Fed's shock absorber is gone.

While that motel was packed, extra cash had a place to park. Now when Treasury auctions hit, when corporations pay taxes, when quarter-ends roll around and everyone wants to move money at once, that demand pulls directly from bank reserves. No cushion. Just friction.

Remember September 2019? Probably not, unless you work in finance or have anxiety issues. Corporate tax payments and a big Treasury auction hit together, cash drained and overnight repo rates jumped from 2% to 10% within days. The Fed rushed in with emergency liquidity. Everyone called it technical. It wasn't.

Another 2019-style liquidity crunch means overnight funding costs could spike, which can ripple into higher yields and volatility across markets, not just for the pros but for anyone buying bonds, holding a money-market fund or relying on credit.

If the Fed has to scramble again, it might have to open the financial firehose unexpectedly, jolting rates and prices for savers, borrowers and investors. "Higher-for-longer" would be the market's initial guess, with all the works: pricier mortgages, risk-off in stocks and another round of "is my money-market fund actually safe?"

We are closer to that moment now than we have been in six years. The safety valves are drained, reserves are lower - and your money-market fund is the first domino. The chart below shows the Fed repo facility usage timeline of the three major stress events: the 2019 repo crisis, the 2020 COVID-19 emergency and the current spike as reserves drain from the end of QT.

Source: Federal Reserve Economic Data $(FRED)$

The spare tire they said they'd never need

The Fed's Standing Repo Facility is a credit card for when things get weird. It's been getting real weird.

Then there's the Standing Repo Facility. That's the Fed's emergency lending window. The backstop they said they'd "hardly ever use." The facility that lets big dealers hand over Treasurys and get overnight cash at a preset rate. It's the central bank's credit card for when things get weird.

It's been getting real weird.

Some days, dealers have borrowed up to $10 billion from the facility. Used to be that this was a quarterly thing. Now it's Tuesday.

Here's the tell: Private repo rates are printing above the Fed's own ceiling on this facility. Which means the system is so tight that people are actually paying more to borrow in private markets than the Fed's supposed "emergency" rate. That's not a technical adjustment. That's a failure of monetary control. That's the Fed admitting it can't actually set the price of money anymore. The market is doing it for them.

When your emergency credit card becomes your everyday card, you don't have an emergency plan anymore. You have a problem.

Your money-market fund is a hostage. Here's why.

The government buying its own debt isn't a sign of strength. It's a sign it ran out of other buyers.

The Fed halted quantitative tightening a year ahead of schedule. Officials first signaled the move in late October and formally confirmed it in the minutes released on Nov. 19. They didn't announce this as a victory. They announced it like someone admitting they ran out of gas and had to call AAA.

The reason? Reserves are running too low. Funding markets are fragile. The plumbing is clogged, and the Fed thinks it's wise not to keep draining the tank while something is clearly wrong.

That's not policy. That's damage control.

So what do you do? Here's the short version: Make sure your "safe" money isn't the first thing to suffer when the pipes burst.

For your money-market funds: Prime money-market funds own corporate paper and other commercial debt, the kind of stuff that runs into trouble when funding tightens. Government money-market funds own Treasurys and Fed-backed repos, and they are safer when the financial system gets a fever.

Move there and stay there. Avoid Treasury bills that mature on Dec. 31 and March 31 - the quarter-ends. Repo stress historically spikes at those times, and bills trade at a discount because nobody wants to be holding them when the pipes rattle.

For your bonds: The Fed is now buying $40 billion to $50 billion a month in Treasurys. A price-insensitive buyer is back in the market. That puts a floor under prices for now, but don't take the bait. I've said it before and I'll say it again: Stay out of long bonds. The government buying its own debt isn't a sign of strength. It's a sign it ran out of other buyers.

For stocks: When money gets tight, people buy defensive stuff. That means companies with steady cash flow, low debt and products people need whether times are good or bad. Financial stocks get whacked first because banks live and die on repo markets working smoothly.

For gold and crypto: Gold (GC00) is the "I don't trust the system" trade. Bitcoin (BTCUSD) is the "I really, really don't trust the system" trade. If the Secured Overnight Financing Rate - the benchmark cost of overnight dollar funding - spikes and margin calls go out, both get bought as the financial system seizes up, because SOFR is the number that tells you when the pipes are bursting.

The confession nobody wants to hear

Check where your cash is parked as the central bank walks liquidity to the edge of what the system can bear.

The Federal Reserve has ended quantitative tightening - the process of letting bonds mature without replacement that it launched in 2022 to drain pandemic liquidity and look tough on inflation.

It is ending because cash reserves are sliding toward levels where ordinary month-end flows cause extraordinary headaches. The Fed's overnight reverse repo facility, which once parked about $2.5 trillion, is practically empty. That cushion walked off the balance sheet and into your money-market fund.

The next act will be quiet "reserve-management" buying of short-term Treasurys to keep reserves from dropping through the floor, the kind of plumbing work balance-sheet watchers are already gaming out in their notes. Markets will find it pleasantly cushy.

You cannot fix the Fed's pipes. You cannot make banks lend reserves they would rather hug, or persuade dealers to take funding risk just to be good sports. What you can do is check where your cash is parked as the central bank walks liquidity to the edge of what the system can bear.

The warning light is on. Powell just eased up on the gas to drop to 55 mph from 70 and patted your knee. You are in the passenger seat with no seat belt, and the dashboard lights are blinking like they're trying to tell you something in Morse code, which you never learned.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. He holds gold and bitcoin in his personal account.

Agree? Disagree? Share your comments with Charlie Garcia at charlie@R360Global.com. Your letter may be published anonymously in the weekly "Dear Charlie" reader mailbag.

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Everyone's waiting for a rate cut. But the Fed has already made its big money move.

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