The Fed may have launched its first easing cycle since 2007 and liquidity-sapping quantitative tightening may finally be over, but Powell may have a much bigger problem on his hands - one which has nothing to do with China, and everything to do with a dramatic drain of liquidity in the market over the next two months.
We first hinted at this last week when we noted that as part of the recently completed debt ceiling deal, instead of taking its time in replenishing the cash balance (green line in the chart below), the US Treasury will scramble to rebuild its cash balance up to $350 billion, from today's level of $133 billion (gray line), a process which as we said last Wednesday will "significantly tighten up liquidity in the banking system and potentially result in turmoil in funding and money markets as the world is flooded with an issuance of T-Bills" as the Treasury seeks to fill the $217 billion cash hole, which will lead to a substantial liquidity withdrawal from the broader financial system as shown in the following Nordea chart.
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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