The recent rebound in U.S. liquidity, or money supply, is expected to be short-lived, according to JPMorgan analysts.
While the uptick challenges their previous forecast of a mildly contracting trend, the bank maintains that the overall liquidity will likely resume its decline before the year ends.
JPMorgan initially projected that U.S. liquidity would enter a “mildly contracting trend from April onwards,” a trend they expected to continue until at least year-end.
This prediction was based on three key factors: the continuation of the Federal Reserve’s quantitative tightening (QT), a bottoming out in the usage of the Fed’s reverse repo facility, and a milder expansion of U.S. bank loans compared to previous years.
However, after contracting in April, U.S. liquidity has seen a recent rebound.
Despite this, JPMorgan analysts believe this increase is temporary. They identify two recent events that contributed to the temporary rise in liquidity.
First, the U.S. Treasury General Account (TGA) balance fell below the $850 billion level anticipated for September-end. Currently, the TGA balance is around $743 billion, and as it rises back to $850 billion by the end of September, it is expected to exert “downward pressure on U.S. liquidity.”
Second, the reduction in the Fed’s reverse repo facility to below $300 billion in August also boosted liquidity.
The bank explains that this reduction was driven by elevated U.S. Treasury bill issuance in July and August, which led money market funds to shift from reverse repos to T-bills.
However, JPMorgan expects this force to fade, with little T-bill issuance anticipated between now and the end of the year, leading the Fed’s reverse repo facility to stabilize near current levels.
JPMorgan concludes that these factors suggest the recent increase in U.S. liquidity “should prove temporary.”
