Delphi Digital: The Fed's liquidity buffer has run dry, and a key headwind for the crypto market may be receding.

According to an article published on the X platform by Delphi Digital, as reported by Odaily Planet Daily, the Federal Reserve's reverse repurchase agreement (RRP) balance has fallen from a peak of over $2 trillion to almost zero, meaning its liquidity buffer has been exhausted.

In 2023, the RRP was large enough to buffer the replenishment of the Treasury's General Account (TGA) by absorbing Treasury bond issuance, thus avoiding the depletion of bank reserves. As the RRP balance bottomed out, this buffer disappeared. Any future Treasury bond issuance or TGA restructuring would directly deplete bank reserves.

The Federal Reserve faces two choices: allow reserves to decline and risk another surge in repo rates, or directly expand its balance sheet to provide liquidity. Given the situation in 2019, the second option is more likely. This means the Fed will shift from withdrawing liquidity to injecting it back into the market, a significant change from the past two years.

With the end of quantitative tightening (QT) and the impending reduction of TGA, marginal liquidity has turned net positive for the first time since early 2022. A key headwind in the cryptocurrency market may be receding.