🚨 The Fed’s Quiet Warning — Hidden Beneath the Rate-Cut Noise 🚨

While investors stay glued to when interest rate cuts might come, the Federal Reserve is watching something far more fragile behind the scenes: liquidity in short-term funding markets.

📄 December Fed minutes reveal growing concern over tightening cash reserves in the banking system. Warning signs are already flashing — volatile repo rates, widening gaps between market rates and the Fed’s own benchmarks, and increased dependence on the Fed’s standing repo facility.

⚠️ Officials noted that reserves have slipped into a danger zone where even small shifts in demand could stress overnight funding markets — echoing conditions seen just before the 2019 repo market shock.

🧊 Liquidity risks could intensify further due to seasonal pressures, including year-end balance-sheet effects and a major spring drain from tax payments. To stay ahead of trouble, policymakers discussed buying short-term Treasuries and adjusting liquidity backstops to prevent disruptions before they spiral.

📉 Bottom line:

Even as markets price in near-term rate stability, the Fed’s focus is shifting to the plumbing of the financial system — and whether it can withstand the next shock without emergency intervention.

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