A silent shift is taking place in the money market. The Federal Reserve's recent move—removing the cap on the $500 billion repurchase agreement facility—seems like a technical adjustment, but in fact, it is an early defensive measure against liquidity risks.

This is not a simple policy tweak. Behind Powell's team’s actions lies an anticipation of deeper financial risks. Restarting balance sheet expansion, large-scale purchases of short-term Treasury bills, lifting the cap on standing repo facilities—all these measures point to the same issue: the liquidity in the U.S. banking system is undergoing a subtle yet dangerous transformation.

From the most direct price signals, the cost of funds in the overnight repo market has clearly risen. The SOFR-OIS spread has widened significantly, indicating that market expectations for funding costs are increasing. On the quantitative side, signals are also being sent—reverse repo tools are nearing exhaustion, and the frequency of calls on standing repo facilities is increasing. These indicators together paint a picture of gradually mounting liquidity pressure in the money market.

Why is the Fed acting now? Because they are well aware of the lessons from the 2019 "cash crunch." Back then, the Fed underestimated the banking system’s actual demand for reserves, resulting in overnight repo rates soaring above 10%, catching the entire market off guard.

Today’s situation is even more complex. As balance sheet reduction continues, excess cash reserves in the banking system have shrunk significantly. This means the market’s resilience to funding fluctuations is weakening, and any external shock could trigger a more intense reaction. As reserves transition from "extremely ample" to "adequate" and even to "structurally tight," the hidden risks have been noticed by the Fed.

This move is less about responding to a crisis and more about preemptively plugging a potential trillion-dollar gap before a crisis actually erupts. The Fed is sending a clear message to the market: we see the risks clearly and are prepared.