Liquidity pressures in the financial system spiked into year-end:

Demand for the Fed’s Standing Repo Facility (SRF) just jumped to $75 billion, the highest since the facility became permanent in 2021.

The SRF enables banks to borrow cash from the Fed, using government bonds as collateral, acting as a key source of liquidity support for the financial system.

The elevated stress stems from banks stepping back from private short-term funding markets to present stronger balance sheets at the end of the calendar year.

While seasonal pressures are typical at the end of December, the scale of Fed borrowing suggests underlying liquidity stress is more elevated than usual.

This is primarily because bank reserves at the Fed remain historically tight, near their 4-year lows of $2.9 trillion.

Meanwhile, the Fed began buying $40 billion of Treasury bills per month on December 12th in a move to ease short-term funding stress.

Market liquidity should soon improve.

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