The US Federal Reserve injected $29.4 billion into the banking system on Friday, the largest short-term liquidity boost since the 2020 pandemic. Although the Fed used its Standing Repo Facility (SRF) purportedly to ease liquidity strains in money markets, it could also help take risk assets like Bitcoin into an early November bull run.
According to Bloomberg, central banks have been pulling back pandemic-era easy money policies just as governments ramp up debt issuance, draining cash from the financial system.
On October 31, the operation supplied $29.4 billion in overnight loans to expand the pool of bank reserves that had slipped to around $2.8 trillion. The decision helped drive repo rates lower to counteract the tightening that had gripped short-term funding markets.
Fed uses repo loans to boost market liquidity
The Fed’s repo operation has temporarily added cash to the reserves of major banks and primary dealers to cool pressures on short-term funding rates that had spiked to market-jerking highs in recent weeks.
Through the SRF, the Fed lends cash overnight to banks against high-quality collateral such as US Treasury securities and mortgage bonds, meant to keep short-term interest rates and the repo rate stable enough to prevent a sudden freeze in the flow of credit in financial systems.
A repo, or repurchase agreement, is a short-term loan provided overnight between two parties. One party lends cash to earn a small return, while the other borrows that cash by posting US Treasuries or similar assets as collateral.
The last time the Fed was forced to inject such significant amounts into the repo market was in September 2019, when short-term rates surged unexpectedly, prompting the central bank to pump roughly half a trillion dollars into the financial system over several months.
“Global money markets will all need to find their way in a world without excessive reserves. Although central banks now have many ways to pump in liquidity if needed, the question is whether such liquidity will reach those in need,” said Michiel Tukker, senior rates strategist at ING.
Temporary reprieve, not a return to QE
Friday’s liquidity injection has made market observers more uncertain about the Fed’s intentions heading into the end of the year. However, economists believe the SRF operation should not be mistaken for quantitative easing (QE), the large-scale asset purchases used during past crises to flood the financial system with liquidity over months or years.
Unlike QE, the SRF provides short-term, reversible loans rather than permanent balance sheet expansion. The funds added on Friday will be withdrawn as those loans mature, which means the overall effect on liquidity is rather temporary.
Still, risk assets tend to benefit from abundant liquidity and easing short-term funding pressures, particularly the largest coin by market cap, Bitcoin. Looking at historical data in 2020, when the Fed added trillions of dollars to the financial system to prevent a credit collapse, Bitcoin surged from around $7,000 in the first quarter of the year to nearly $30,000 by December.
“If and only if system-wide reserves are indeed suddenly scarce, more aggressive action by the Fed would be needed,” CEO and CIO of Damped Spring Advisors Andy Constan wrote on X. “It will all work itself out fine. If it doesn’t, rates will have to stay elevated, and the SRF will have to grow rapidly. Before that, it’s mostly worth ignoring.”
Rate cuts in December are not guaranteed
As reported by Cryptopolitan, the Fed’s decision to cut rates last Wednesday was followed by a word from Chair Jerome Powell that another reduction in December was not guaranteed. The cautious stance surprised economists who had priced in nearly a 100% probability of another cut before year-end.
Treasury Secretary Scott Bessent warned that parts of the US economy are already in recession, telling CNN on Sunday that “the Fed has caused a lot of distributional problems with their policies,” suggesting that uneven impacts of monetary tightening could worsen the US economy’s growth if the central bank does not trim rates further.
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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