Yesterday we discussed the Fed meeting, and focused on the return to balance sheet expansion.
The Fed just officially ended quantitative tightening on December 1st. And now, they're turning the liquidity spigot back on — beginning tomorrow!
And if we pay attention, the schedule and size suggest that there is indeed a dollar crunch. From the schedule the Fed released today, they're going to add $46 billion to the balance sheet over the next four weeks.
And remember, Jerome Powell also, matter-of-factly, signaled that the U.S. economy now requires the Fed to print $250-$300 billion a year, forever.
Could this have something to do with Europe?
Europe needs U.S. dollars (to fund trade, to fund dollar assets, to fund war-related outlays).
The European banking system is heavily reliant on market-based dollar funding (swaps and repos).
The European political class is making policy choices (on Russia’s reserves, on tariffs, on security) that increase the odds of future stress in those same funding channels.
And the coming Trump-aligned Fed has European policymakers publicly airing concerns that the Fed won't have their back in times of stress: less global coordination and no automatic dollar liquidity (dollar swap lines).
If Europe were trying to self-insure against Trump/Fed dollar liquidity risk by stockpiling dollars now, where would it show up?
It would show up exactly where we are seeing it: In the sudden "tightness" of the US money markets that forced the Fed to act yesterday.
