2019 Money Crunch Redux? Key Indicators Warning of Scarcity in the US Financing Market

A key indicator measuring the scarcity of the US financing market recently issued a warning: the Federal Reserve's balance sheet reduction (QT), or quantitative tightening, may trigger a "money shortage".

The latest data released by the Federal Reserve shows that the level of intraday overdrafts surged earlier this year, indicating that banks withdrew more funds from the Federal Reserve than they had in their Federal Reserve accounts. Specifically, in the last two weeks of February, the average daily overdraft amount rose to $6.6 billion, then, in the week ending March 6, briefly surged to $11.9 billion, reaching a four-year high.

The surge in intraday overdrafts is a concerning signal for some Wall Street insiders, as it reflects a situation similar to the turmoil in the US financing market in September 2019, although not as extreme as back then.

Lou Crandall, an economist at Wrightson ICAP, a research institution specializing in Federal Reserve operations and policies, US Treasury financing trends, and high-frequency economic data, wrote in a recent report:

"The Federal Reserve's intraday overdraft level is an important warning signal of potential liquidity stress on the eve of the repo market crisis in September 2019. Given that history, we are slightly concerned about the first-quarter data recently released."

Crandall pointed out that in the first two weeks of January, the Federal Reserve's data for the reporting period was consistent with trends in the past few years, but in the following five two-week reporting periods, the intraday overdrafts "showed a pattern reminiscent of the surge in intraday overdrafts in 2019."

In September 2019, the US repo market experienced a brief but intense liquidity shock, known as the "repo crisis". At that time, the Federal Reserve was ending its balance sheet reduction, concluding a tightening cycle; against the backdrop of significantly reduced US dollar liquidity, the Treasury issued debt after raising the US debt ceiling; in addition, factors such as tax periods and RLAP regulations all "converged".

On September 17, 2019, the US SOFR rate jumped to 5.25%, intraday surging to 10%, far above the upper limit of the then Federal Reserve target rate range of 2.25%. US stocks were affected, with the VIX and OFR financial stress indices for stocks and gold briefly rising, and after the Federal Reserve quickly injected liquidity to "rescue the market", calm was restored.

Wall Street News once mentioned that mainstream research believes that the 2019 repo crisis was an incidental event under a slightly tight liquidity situation. The main culprit that triggered the crisis was the scarcity of excess reserves, combined with factors such as tax payment days, heavy Treasury issuance, and large banks having to reserve a large amount of reserves due to intraday liquidity regulatory measures.

Crandall stated that considering the total bank reserves for the week of March 6 were around $3.6 trillion, Wrightson ICAP views the sharp increase in intraday overdrafts for that week as an abnormal phenomenon, but this overdraft phenomenon is still worth monitoring. He wrote in the report: "The trend of overdrafts is likely to become a useful indicator of changes in liquidity conditions over the next few quarters "In view of the abnormal data in the first quarter, we will interpret this series of data more cautiously."

In May of this year, Roberto Perli, the manager of the New York Fed's System Open Market Account (SOMA) responsible for overseeing the Fed's asset portfolio, listed some indicators that Fed officials are monitoring to determine when bank reserves are starting to become scarce and the Fed's Quantitative Tightening (QT) may need to be paused. These indicators include the federal funds rate and reverse repurchase agreement balances, borrowing by domestic institutions in the federal funds market, the share of interbank payments after 5 p.m. New York time, and banks' intraday overdrafts