Institutional brokerage and advisory firm Strategas said market liquidity has fallen by $150 billion since the U.S. debt ceiling was suspended earlier this month. According to a note by Strategas, the market decline is a result of the Treasury Department’s issuance of debt and the Federal Reserve’s quantitative tightening program to reduce its balance sheet. The debt ceiling deal cleared a path for the Treasury Department to auction more T-bills, but the money to buy the T-bills comes out of financial markets, and the Fed’s reverse repurchase program isn’t offsetting the liquidity from the auctions. Dan Clifton, head of policy research at Strategas, warned that draining liquidity from the system could cause more bank failures and that risk will pressure the Fed to slow its quantitative tightening.
