GM. This is Milk Road Macro, the newsletter that lifts the curtain on the Fed’s magic trick—tightening with one hand, flooding markets with liquidity behind its back.

Here’s what we got for you today:

• ✍️ Deciphering the murky world of Fed Liquidity

• 🍪 The Big Beautiful Bill passed the House

• 🍪 Jamie Dimon warns of US stagflation risk

DECIPHERING THE MURKY WORLD OF FED LIQUIDITY

You may have heard of "stealth QE".

You may have heard of "not QE, QE".

But what does it all mean? 

And how does it all work?

The Federal Reserve and the US Government are experts at funneling liquidity (money) into financial markets through any avenue possible.

Their actions have helped to underpin the risk asset bull market we've seen take place since early 2023.

Welcome to the murky world of "Fed Liquidity".

And Fed Liquidity will be rising over the coming weeks.

So let’s run through it - keeping things as simple as possible:

Quantitative Easing

The Fed engaged in monster Quantitative Easing (QE) through 2020 and 2021 following the start of the COVID pandemic.

This means the Fed was "printing money", buying up bonds, and putting them on the Fed balance sheet.

When QE occurs, bank reserves (a "special" form of money used between commercial banks) increase.

QE is a liquidity injection into markets, and generally leads to an increase in risk asset prices (think US stocks and Bitcoin).

This is what we saw in 2020/2021: the Fed balance sheet increasing, bank reserves rising, and asset prices rising.

There was a lot of liquidity (money) sloshing around.

Quantitative Tightening

Then in early 2022, in the face of rampant inflation, the Fed switched 180 degrees and started a Quantitative Tightening (QT) regime.

And it’s still going today.

This is the opposite of QE.

The Fed lets maturing bonds "run off" its balance sheet.

So the Fed balance sheet shrinks, and bank reserves decrease.

QT is (theoretically) a liquidity drain from markets.

It generally puts downward pressure on risk asset prices.

This is what we saw in 2022: Fed balance sheet shrinking, bank reserves falling, and asset prices falling.

There was less liquidity (money) sloshing around.

So far, so simple.

But wait...

What's going on here?

So, why have bank reserves been increasing, or at least remaining flat, since the start of 2023?

(Coincidently, the start of this current risk asset bull market.)

Isn't the Fed still doing QT?

Yes - the Fed balance sheet has shrunk by $1.8 trillion since January 1, 2023.

But this is the murky world of "Fed Liquidity".

The Fed is shrinking its balance sheet through QT (theoretically a liquidity drain) - but liquidity is actually increasing/holding steady.

So what in the world is going on here?

Well, there are other sneaky parts of the Fed that add and remove liquidity.

These can be used to essentially "counteract" the negative liquidity effects of QT.

There are quite a few of these liquidity-altering facilities - but let's focus on the 3 main culprits.

1/ Bank Term Funding Program

You may remember the "Regional Bank Crisis" in the US in early 2023.

A number of commercial banks ended up folding, including Silicon Valley Bank.

Amid the chaos, there were many banks in dire need of liquidity.

So the Fed hastily threw together a "temporary" liquidity facility - called the Bank Term Funding Program (BTFP).

Over the following months, banks tapped roughly $170 billion from the BTFP in the form of attractively priced loans.

This was a liquidity injection, pushing up bank reserves.

As the banking crisis unfolded in February and early March 2023, risk asset prices fell.

But asset prices soon rebounded higher as the liquidity taps were turned on.

This "temporary" liquidity facility is now spent, as banks have repaid the loans.

The BTFP has been closed by the Fed, but it's possible it could be reopened at a moment's notice, if there is any sign of banking trouble again.

2/ Reverse Repo

The Reverse Repo (RRP) is a big one.

We're talking $2 trillion big.

You see, the Fed went so crazy in 2020 and 2021 that there was simply too much money sloshing around.

And there wasn't enough short-dated US Treasuries (T-bills) to satisfy demand for short-term yield.

So financial institutions piled into the RRP facility at the Fed, which offers a small overnight yield.

RRP usage hit a huge high of just under $2.5 trillion in December 2022.

This can essentially be thought of as old QE money "locked up" at the Fed, removed from financial markets.

But previous Treasury Secretary Janet Yellen was smart.

She knew that if she relentlessly issued a flood of new T-bills, she could tempt this cash out of the RRP and back into financial markets.

So, she broke into the "piggy bank".

And we saw an avalanche of "new" liquidity hitting markets through 2023 and 2024.

More than $2 trillion left the RRP and entered markets.

This was a massive liquidity injection, pushing up bank reserves - and completely overriding the negative liquidity effects of QT.

You'll notice there aren't many "coins" left in this particular piggy bank.

It's been basically sucked dry (almost).

But there's another piggy bank…

3/ Treasury General Account

This is the most important piggy bank to watch over the coming weeks.

The Treasury General Account (TGA) is essentially the US Government's bank account at the Fed.

The TGA balance is currently $475 billion.

When cash is sat idle in the TGA at the Fed, it is removed from financial markets.

But when the Government spends TGA cash back into the economy, it is a liquidity injection into markets.

TGA balance falling = liquidity injection into markets

TGA balance rising = liquidity drain from markets

The current TGA dynamics are quite complicated and there's a lot of nuance (I can delve into this further in a future newsletter).

Skipping over some details, we are currently in the middle of a mechanical "TGA drawdown" process, fuelled by the US Government debt ceiling.

This is a liquidity injection, pushing up bank reserves.

This TGA liquidity injection wave started in February 2025 and will likely continue until roughly July or August 2025.

So there's hundreds of billions of dollars of liquidity coming from the TGA over the next few weeks.

Net Federal Reserve Liquidity

Let's now combine the four main components together to see the full scale of all major liquidity altering aspects of the Federal Reserve.

This is called "Net Fed Liquidity" (the total amount of liquidity being added/removed by Fed sources).

Fed balance sheet - Reverse Repo - Treasury General Account + Bank Term Funding Program.

Here, we solve the puzzle of why bank reserves are rising/remaining flat, despite the Fed's continued QT regime.

Because the TGA is currently being depleted, we're in the middle of a "Fed liquidity upswing" that started in early January 2025.

So here's a very rough estimate of the path forward for Net Fed Liquidity over the coming weeks into the summer (it’s going up).

So, at least for the next few weeks, we might be in a pretty decent spot for risk assets.

But let’s watch to see how things play out.

That’s it for today - catch you for the next one.

BITE-SIZED COOKIES FOR THE ROAD 🍪

The Big Beautiful Bill passed the House. It keeps Trump tax cuts and adds spending but must clear the Senate next.

Jamie Dimon (JP Morgan CEO) warns of US stagflation risk. He says the Fed was right to hold rates steady as slowing growth and rising prices squeeze the economy.

S&P Global flash PMI surges in May. This rise above 50 shows improving global business confidence and stronger new orders that may drive growth.

MILKY MEME 🤣

RATE TODAY’S EDITION