QT was announced in 2022 and it was supposed to remove excess reserves from the system.
Yet, the amount of liquidity removal so far has been ZERO and the Fed might announce a QT tapering next week!
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Solana memecoins are collectively at an all-time high

A memecoin market flippening could be underway

Fed’s bond holdings are down $1.6 trillion from their peak in mid 2022 (due to QT), yet bank reserves (aka ‘’liquidity’’) are virtually unchanged!
Blue: Fed bond holdings
Orange: bank reserves (aka liquidity)
Why is this happening?
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Normally, QT works by draining reserves from the system.
Here are 5 simple steps to understand how:
Step 1-2: the Fed doesn’t reinvest maturing bonds (1) from its QE portfolio (= performs passive QT) and therefore destroys reserves (2);
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Step 3-5: the government needs to roll-over its funding, but the Fed isn’t rolling over its bond holdings (3).
Banks now needs to step up and absorb more of the newly issued securities (4-5).
In this standard iteration, QT removes reserves from the system.
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Yet something different is happening this time.
We are witnessing a Liquidity Sterilization process.
Money Market Funds (MMF) are picking up the slack and effectively Sterilizing QT.
The tables below explain how - have a look at option 2.
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Yellen has skewed the US bond issuance dramatically towards T-Bills to the extent that now they represent &gt;20% of the suggested share of US marketable debt.
The Treasury has been feeding hungry money market funds (MMF) which have a large amount of money parked at the RRP..
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The Liquidity Sterilization consists in MMF absorbing the new government T-Bill issuance, hence leaving liquidity in the system intact.
In its Liquidity Sterilization format, QT can't operate neither of its two tightening levers:
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- Liquidity isn't drained;
- The private sector isn't called to absorb duration risk as T-Bills carry very little of it.
So, what happens next?
The RRP facility has been drained a lot, so this sterilization process can't continue forever but...
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...on the other hand, policymakers could soon:
- Slow down QT (Fed): QT tapering announcement perhaps next week
- Drain down the Treasury General Account (Yellen): hence injecting new reserves in the system
Liquidity could remain abundant for another 6 months.
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