Core Viewpoint - The Federal Reserve may take additional measures to address pressures in the funding markets, even after potentially ending its balance sheet reduction this week [1][2] Group 1: Federal Reserve Actions - Multiple Wall Street banks, including JPMorgan, expect the Fed to stop reducing its $6.6 trillion portfolio of U.S. Treasuries and mortgage-backed securities (MBS) as early as this month [1] - JPMorgan strategists anticipate that the end of quantitative tightening (QT) will prevent further liquidity loss in the system, but funding pressures may persist [1] - The Fed is likely to implement temporary open market operations to alleviate common market tensions during key payment dates [1][2] Group 2: Market Conditions - Since the Fed began reducing its asset portfolio in June 2022, over $2 trillion has exited the financial system, leading to a significant drop in the reverse repurchase agreement (RRP) balance [2] - Various borrowing rates used in interbank lending have risen and remained high, indicating that bank reserves have not fully circulated within the financial system [2] - The Fed's benchmark rate has increased four times since the last meeting in September, reflecting tighter liquidity conditions [2] Group 3: Future Expectations - Once the Fed halts the reduction of its Treasury holdings, it is expected to reinvest funds into newly issued Treasuries to rebuild bank reserves, with regular T-bill purchases anticipated to start in early 2026 [2] - JPMorgan strategists suggest that the Fed should consider lowering the rate on the Standing Repo Facility (SRF) by 5 basis points to encourage more active use of the facility [3] - Market observers believe that the Fed's work will not be complete after ending asset reduction, as it may need to expand its asset size again to maintain balance in the reserves market [4]

Core Insights - The U.S. financial system is experiencing a significant liquidity contraction, influenced by Treasury auction settlements and corporate quarterly tax payments [1] - The secured overnight financing rate (SOFR) has risen to 4.51% as of September 15, marking a notable increase from 4.42% the previous trading day, and the largest single-day rise since December 31 [1] - The spread between SOFR and the effective federal funds rate has widened to 18 basis points, the highest level since December 26, as market expectations suggest a potential 25 basis point cut by policymakers [1] Group 1 - The increase in SOFR is attributed to a combination of the U.S. Treasury rebuilding cash reserves and the Federal Reserve's ongoing balance sheet reduction [1] - The usage of a Federal Reserve overnight lending tool, often seen as an indicator of excess liquidity in the financing market, has dropped to a four-year low [1]