Global liquidity tightness remains unresolved! The Federal Reserve's latest meeting minutes indicate a clear intention for QE. However, recent liquidity strains have not eased but instead show signs of intensifying. According to the latest FT report, JPMorgan Chase is shifting $350 billion (over RMB 2.4 trillion) in reserves from its Federal Reserve account into U.S. Treasuries, aiming to lock in yields ahead of potential rate cuts. Notably, a research report from Discovery Alert highlights that the $63 trillion shadow banking system is gradually becoming a potential source of instability in global financial markets. Meanwhile, the private credit market, valued at around $1.8 trillion, is seen as another emerging risk.
**JPMorgan Chase Shakes Liquidity** Since 2023, JPMorgan Chase has withdrawn nearly $350 billion in cash from its Federal Reserve account, redirecting most of it into U.S. government bonds to hedge against potential profit erosion from rate cuts. Data from BankRegData shows that the bank, with over $4 trillion in assets, slashed its Fed deposit balance from $409 billion at the end of 2023 to $63 billion in Q3 this year. Concurrently, its U.S. Treasury holdings surged from $231 billion to $450 billion, allowing it to lock in higher yields ahead of Fed easing.
This shift reflects how major U.S. banks are preparing for the end of an era of easy profits, where they earned interest on Fed deposits while paying near-zero rates to depositors. After rapidly hiking rates from near-zero to over 5% in 2022–early 2023, the Fed began cutting rates in late 2024, signaling further reductions ahead. This month, rates hit a three-year low.
Unlike competitors like Bank of America, which suffered heavy paper losses on long-term debt when rates spiked in 2022, JPMorgan avoided such bets during the low-rate years of 2020–2021. Its stable deposit base allowed it to profit from higher Fed rates. Now, moving cash into bonds preemptively helps lock in yields before further cuts.
JPMorgan’s withdrawals are so massive that they offset the net changes in Fed deposits across all 4,000+ U.S. banks. Total bank reserves at the Fed have dropped from $1.9 trillion in late 2023 to ~$1.6 trillion. Analysts warn this could strain systemic liquidity. Since 2008, banks earned interest on Fed reserves, a tool for managing short-term rates—but soaring interest expenses ($186.5 billion in 2024) complicate this mechanism.
**Looming Crisis** The Discovery Alert report warns that the $63 trillion shadow banking sector—including money market funds, securitized vehicles, and private credit—is becoming a destabilizing force. Liquidity mismatches in non-bank intermediaries are pressuring credit markets, especially as high rates persist.
Concentrated investments in liquid assets boost efficiency in stable times but amplify volatility during sell-offs. Private credit (~$1.8 trillion), with its promises of liquidity to wealthy investors, faces risks as funds flow into illiquid long-term assets. Underwriting standards slipped during the 2021–2024 boom, with risks now emerging as credit tightens.
Recent market moves reflect these concerns. High-yield bonds (e.g., infrastructure/data center firms) have seen prices drop and yields spike. CoreWeave’s bonds now trade with risk premiums above their ratings, signaling investor reassessment of high-leverage structures.
Policy responses are also in focus. The Fed’s new $40 billion/month Reserve Management Purchases (RMP) suggest a growing emphasis on financial stability alongside inflation control. Historically, shadow banking stress precedes broader market turmoil—as seen in 2008 and 2020. Today’s widening credit spreads, rising funding costs, and asset repricing demand close monitoring.
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