Tight Liquidity in the US Financial System: Fed Emergency Meeting and Repo Market Pressure

Introduction: Sudden events reveal systemic concerns.

On November 12, 2025, during the Federal Reserve's annual Treasury market conference, the New York Fed suddenly held an emergency meeting that was not publicly announced in advance, engaging in closed-door consultations with major Wall Street banks and executives. The focus of the meeting was on the liquidity pressures in the repo market and how to encourage financial institutions to make greater use of the Federal Reserve's Standing Repo Facility (SRF). This event was exclusively reported by the Financial Times on the evening of November 15, quickly drawing market attention. The report noted that this meeting was a temporary arrangement aimed at alleviating stress signals in the “pipeline” of the U.S. financial system, and there had been no prior public warning.

This sudden incident is not isolated but rather a concentrated manifestation of the challenges faced by the U.S. financial system in long-term liquidity management. Since 2022, the Federal Reserve has been continuously implementing Quantitative Tightening (QT), aiming to gradually reduce the size of its balance sheet in response to inflationary pressures. However, this policy began to show side effects in the second half of 2025: a decrease in bank reserves, increased volatility in repo rates, and even signs that the Federal Reserve's control over short-term funding pricing is weakening. As of November 17, 2025, market data shows that the secured overnight financing rate (SOFR) has repeatedly hit or exceeded the upper limit set by the Federal Reserve for several consecutive days, and the Federal Funds Rate is also showing an upward trend.

This article will analyze the causes, manifestations, historical comparisons, and potential impacts of the current liquidity crunch based on the latest data. By objectively sorting through key elements such as the dynamics of the Federal Reserve's balance sheet, changes in the Treasury General Account (TGA), and indicators from the repurchase market, it reveals the structural vulnerabilities of the U.S. financial system. The data is sourced from official reports from the Federal Reserve, releases from the New York Fed, and reliable financial media, up to November 17, 2025.

The roots of liquidity tightness: multiple squeezes of quantitative tightening

The liquidity management of the US financial system relies on the Federal Reserve's monetary policy toolkit, of which quantitative tightening is the core driving factor of current pressures. Since the initiation of QT in June 2022, the Federal Reserve has been passively reducing its balance sheet size by about $95 billion per month on average, primarily through not rolling over maturing U.S. Treasury securities and mortgage-backed securities (MBS). As of November 12, 2025, the total assets of the Federal Reserve have declined from a peak of about $9 trillion to approximately $7.2 trillion, with the holding of Treasury securities at $4.193 trillion. This reduction corresponds to the withdrawal of about $1.8 trillion in liquidity from the system, directly reducing bank reserve levels—bank reserves are a core component of the monetary base.

At the same time, the Reverse Repurchase Agreement Facility (RRP) is losing its role as a liquidity “shock absorber.” RRP allows institutions such as money market funds to lend excess funds to the Federal Reserve temporarily to earn stable returns. During the period of quantitative easing (QE), the RRP balance peaked at $2.55 trillion (December 2021), absorbing excess liquidity in the system. However, as QT progresses, the RRP balance has continued to decline. As of November 12, 2025, the RRP balance is approximately $1.82 trillion, a decrease of about 13% from $2.1 trillion in July 2025. This decline reflects a reduction in excess funds within the system: institutions no longer have sufficient idle cash to inject into the RRP and are instead seeking higher-yielding investments.

A factor further exacerbating the pressure is the rapid expansion of the Treasury General Account (TGA). The TGA is the U.S. Treasury's “checking account,” with funds primarily sourced from tax revenue, debt issuance, and transfers from the Federal Reserve accounts. In the first half of 2025, the TGA balance rose from about $364 billion (July) to $940 billion (November 12). This net increase of approximately $576 billion directly withdrew an equivalent amount of reserves from the banking system, as funds first enter the TGA when the Treasury issues debt, reducing the liquidity in the private sector in circulation. For the fiscal year 2025 (ending in October), the average TGA balance has reached $850 billion, an increase of 28% compared to the same period last year.

The enormous deficit of the U.S. government further amplifies this effect. The federal deficit for fiscal year 2025 is expected to reach $1.78 trillion, accounting for about 6.5% of GDP, far higher than pre-pandemic levels. To finance the deficit, the Treasury needs to issue about $2.3 trillion in new debt (including short-term Treasury bills and long-term bonds), which not only raises the TGA balance but also increases market demand for government bonds. In the fourth quarter of 2025, the Treasury expects to borrow $590 billion, with a cash balance target of $850 billion. These combined factors lead to a decrease in bank reserves from about $3.2 trillion at the end of 2024 to about $2.9 trillion by November 2025, with the reserve/GDP ratio dropping from 12% to 10.5%.

The original intention of quantitative tightening is to achieve a smooth transition under the “Ample Reserves” framework, where the level of reserves is sufficient to maintain a low volatility funding market, but not so excessive as to trigger inflation. However, data from 2025 shows that this framework is facing challenges: the reduction in reserves directly raises funding costs, similar to how pressure begins to build in water supply pipes when the water level in a “reservoir” drops.

Warning signals of interest rate indicators: SOFR and the rise of the federal funds rate

The most direct manifestation of liquidity tension is the abnormal fluctuation of short-term interest rates. SOFR, as the benchmark interest rate for the $3.1 trillion repurchase market, measures the cost of overnight borrowing collateralized by Treasury securities. The Federal Reserve regulates SOFR by setting an interest rate corridor: the lower bound is the RRP rate (currently 3.80%), and the upper bound is the SRF rate (4.00%). Normally, SOFR should fluctuate within the corridor.

However, since October 2025, SOFR has hit or exceeded the upper limit for several consecutive days. On November 14, SOFR closed at 4.25%, up 27 basis points (bp) from the average in October (3.98%), and has been above 4.00% for six consecutive trading days. This increase is not a seasonal fluctuation (such as the peak of quarterly tax payments), but rather persistent pressure: the 10-day moving average SOFR-RRP spread has widened from 5bp to 15bp, indicating that the funding supply side has begun to raise pricing.

Similarly, the Effective Federal Funds Rate (EFFR) - the benchmark for unsecured overnight interbank lending - also shows signs of tightening. In October 2025, the EFFR averaged 4.09%, dropping to 3.86% in early November (reflecting a target range of 3.75%-4.00% after the Federal Reserve's 25bp rate cut on October 29). However, on November 12, the EFFR rose to 3.98%, just 2bp below the upper limit, and 18bp higher than the RRP. This contrasts with the first half of 2025, where the EFFR stabilized at a median of 4.33%, indicating a weakening of the Federal Reserve's control over the unsecured market.

The common upward movement of these indicators stems from the supply-demand imbalance: when reserves are scarce, cash-rich institutions (such as a few large banks) can dominate pricing, driving interest rates towards the upper limit. Data from the New York Federal Reserve shows that since September 2025, the average daily trading volume in the repurchase market has increased from $1.2 trillion to $1.4 trillion, with hedge fund borrowing surging to $3 trillion. Additionally, the basis trade—a leveraged strategy used by hedge funds exploiting the futures-spot price difference—has reached $1.8 trillion, primarily funded through repurchase agreements. When repurchase costs rise, such highly leveraged trades (with leverage ratios of 50:1 to 100:1) face margin call pressure, further amplifying market volatility.

Historical Mirror: The Risk of a Repeat of the 2019 Buyback Crisis

The current situation is highly similar to the repo crisis in September 2019. At that time, the Federal Reserve was at the end of QT, bank reserves dropped from $2.3 trillion to $1.4 trillion, and TGA rose from $500 billion to $700 billion. As a result, SOFR once surged to 10% (900bp higher than EFFR), forcing the Federal Reserve to urgently inject liquidity and restart QE.

The similarities in 2025 are evident: QT leads to a similar decline in reserves (about $300 billion), TGA expansion is comparable (about $600 billion), and RRP has fallen back from its peak by 30%. The difference is that the current inflation rate is 2.8% (November data), lower than 2.0% in 2019, but the deficit is larger (7% GDP vs. 4.6%). If the pressure continues, the market may experience a repeat of “lightning” liquidity drought, especially at the end of the quarter (such as the December tax day).

However, the Federal Reserve has learned its lesson: in 2021, it launched the SRF as a permanent backup tool aimed at reducing stigma. But data from 2025 shows that the usage rate of the SRF remains low: a peak of $50.35 billion on October 31, with an average of only $20 billion in November, far below the scale of interventions in 2019 (hundreds of billions). This reflects the hesitation of institutions towards the SRF: on one hand, there are concerns about signaling effects (using it acknowledges liquidity shortages), and on the other, the interest rate cap (4.00%) is not enough to attract active borrowing.

Federal Reserve officials indicate emergency meeting: signals of policy shift

The senior officials of the Federal Reserve have been vocal recently, suggesting that liquidity management needs to be adjusted. On October 14, 2025, Chairman Jerome Powell pointed out in an economic outlook speech: “Liquidity conditions are beginning to tighten gradually, and repo rates are generally rising.” He emphasized that the QT process may be nearing its end, and reserve levels are shifting from “ample” to “adequate.”

Dallas Federal Reserve President Lorie Logan stated on October 31 that fluctuations in the repo rates have led to a gradual increase in the federal funds rate. Although daily fluctuations are severe, the overall trend cannot be overlooked. She suggested that if pressure continues, consideration should be given to resuming asset purchases to stabilize the market. On the same day, the Federal Reserve announced a 25bp rate cut, but Logan opposed it, arguing that inflation remains high (core PCE at 2.6%).

Roberto Perli, manager of the SOMA (System Open Market Account) at the New York Fed, stated on November 12: “Reserves are no longer abundant.” At the annual Treasury conference, he pointed out that the widening SOFR spread and increased use of the SRF are clear evidence of reserve scarcity, and he expects the Fed to “not have to wait too long” to shift to asset purchases.

The peak of these statements was the emergency meeting on November 12. New York Fed President John Williams discussed feedback on the use of the SRF with 24 primary dealers. The meeting emphasized eliminating stigma and encouraging institutions to actively borrow SRF funds during repo stress. Bloomberg reported that dealers warned that without stronger intervention, the $12 trillion repo market could face greater volatility. The following day, the New York Fed released a chart showing that hedge fund repo borrowing reached $3 trillion, an increase of 15% compared to September.

This series of actions indicates that the Federal Reserve is shifting from “observation” to “intervention,” but is avoiding publicly acknowledging the crisis to prevent market panic.

Potential risks and market chain reactions

If liquidity tightness escalates, it could trigger a domino effect. Firstly, the repurchase market is the foundation for government bond pricing, and high costs will push up long-term yields: on November 17, the yield on 10-year government bonds rose to 4.35%, an increase of 20 basis points from the October high. Secondly, leveraged trading amplifies risks: among the $18 trillion in underlying trades, about 70% is financed through repurchase agreements. If SOFR remains above 4.00%, hedge funds may be forced to liquidate positions, leading to a sell-off of government bonds.

The equity market has shown volatility: the S&P 500 index has fallen by 2.5% since November, with technology stocks leading the decline, affected by liquidity concerns. The US dollar index (DXY) has risen to 105, reflecting safe-haven demand. The basis in the bond market has widened, with a futures-spot price difference of 15 basis points.

More broadly, the tightening of interbank lending may transmit to the credit market: the loan interest rate for small and medium-sized enterprises has risen to 6.2%, and consumer spending is slowing down. Internationally, this includes capital outflows from emerging markets, and if the Federal Reserve resumes QE, it will further distort global liquidity.

To mitigate risks, the Federal Reserve could: (1) slow down the pace of QT, reducing the monthly cap to $50 billion; (2) expand the SRF cap or reduce stigma; (3) temporarily inject reserves, as done in 2019. In extreme scenarios, restarting QE could inject hundreds of billions of dollars, but given the 3.0% inflation, this could trigger a policy dilemma.

Conclusion: Balancing Tightening and Stability in Policy Choices

The liquidity tightness in the U.S. financial system stems from the combined effects of QT, TGA expansion, and deficit financing, with the rise of SOFR and EFFR serving as a warning. The Federal Reserve's emergency meeting marks a policy turning point: shifting from tightening to fine-tuning in order to maintain market stability. Historical experience shows that timely intervention can prevent crises, but the current environment is more complex—under high debt and high inflation, any stimulus must be approached with caution.

Looking ahead, the market needs to closely monitor reserve levels (targeting $2.5-3 trillion), the SOFR spread (alert at 20bp), and SRF usage (over $50 billion). If the pressure eases, QT may conclude smoothly; on the contrary, restarting QE becomes almost inevitable. This not only tests the operational capability of the Federal Reserve but also concerns global financial resilience. Investors should pay attention to the signals from the November FOMC meeting and the Treasury's debt issuance plan to seize the turning point.

The data in this article is as of November 17, 2025, sourced from the Federal Reserve H.4.1 report, New York Fed SOFR releases, and financial media.

References:

Federal Reserve H.4.1, Nov 13, 2025.

New York Fed SOFR Data, Nov 14, 2025.

FT Article, Nov 15, 2025.

Bloomberg Funding Market Report, Nov 13, 2025.