Year-End Liquidity Turmoil on the Fed’s Balance Sheet. Plus $38 Billion in T-bills Replace $15 Billion in MBS and Add $23 Billion in RMPs

Core Insights - The Federal Reserve's balance sheet experienced significant year-end liquidity shifts, with the Standing Repo Facility (SRF) spiking to $75 billion before falling back, and Overnight Reverse Repos (ON RRPs) reaching $106 billion before also declining [1][14][15] Group 1: Standing Repo Facility (SRF) - The SRF saw a one-day uptake of $75 billion on December 31, which increased the Fed's total assets temporarily [6][7] - By January 2, the SRF balance fell back to $23 billion, with expectations that it will approach zero in the following week [6][7] - The SRF allows approved counterparties, primarily large broker-dealers and banks, to borrow overnight at a rate of 3.75%, enabling them to profit from lending in the repo market [11][12] Group 2: Overnight Reverse Repos (ON RRPs) - ON RRP balances spiked to $106 billion on December 31, reflecting a significant influx of funds from money markets depositing at the Fed [14] - By January 2, ON RRP balances dropped to just $6 billion, indicating a rapid unwinding of year-end liquidity [14] Group 3: Treasury Bills and Balance Sheet Management - The Fed added $38 billion in short-term Treasury bills in December, with $15 billion replacing mortgage-backed securities (MBS) that came off the balance sheet [2][19] - The Fed's strategy aims to shift its balance sheet composition towards shorter-term securities, with T-bills expected to grow while MBS are phased out [18][23] - The Fed's total assets rose by $104 billion to $6.64 trillion, largely due to the SRF spike and Reserve Management Purchases (RMPs) [27] Group 4: Mortgage-Backed Securities (MBS) - MBS holdings fell by $15 billion in December to $2.04 trillion, with the Fed's plan to continue reducing MBS until they are eliminated [23][24] - The decline in MBS is primarily due to reduced pass-through principal payments as mortgage refinancing and sales have decreased significantly [24][25]