The Federal Reserve suddenly announced that it will be injecting money into the market.

Starting from December 12, it will purchase $40 billion in short-term government bonds each month, with a very straightforward goal — to replenish liquidity in the banking system. Does this sound familiar? That's right, this operation is essentially "giving blood" to the financial system.

The cause of this is that the Fed has found that banks' reserve balances have dropped to a critical level. According to their official statement, reserves have fallen to a "adequate" level — note the quotation marks around "adequate," meaning if reserves fall any further, it won't be enough. So, the Fed had already hit the pause button on balance sheet reduction earlier this month, and now it is actively buying bonds again.

Powell stated more plainly at the press conference on Wednesday: short-term interest rates are rising faster than we expected. He also mentioned that money market rates continue to tighten, and various indicators are signaling signs of stress in the reserve market. In other words, they have no choice but to act.

The New York Fed revealed that this large-scale bond purchasing operation will continue over the next few months, mainly to address the expected surge in non-reserve liabilities in April. After this window, the pace of purchases may slow down significantly.

For the market, this means that short-term liquidity pressures will be eased for now, but how long this can last depends on subsequent data.