Story perspectives

Fed's Tightening Cycle Cuts Liabilities, Affects Money Markets

4/7/2026

Summary

Story summary

The Federal Reserve's 2022-23 tightening cycle relied on two tools: rate changes and balance-sheet adjustments.
Research shows these tools significantly influence money market conditions, especially Treasury repurchase agreements (repo).
An increase in the interest on reserve balances (IORB) raised the liquidity risk premium.
Federal Reserve liabilities declined from nearly $6 trillion to $3.5 trillion by December 2024.
Tightening widened dealer spreads for funding intermediation.

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Story summary

The Federal Reserve's 2022-23 tightening cycle relied on two tools: rate changes and balance-sheet adjustments.
Research shows these tools significantly influence money market conditions, especially Treasury repurchase agreements (repo).
An increase in the interest on reserve balances (IORB) raised the liquidity risk premium.
Federal Reserve liabilities declined from nearly $6 trillion to $3.5 trillion by December 2024.
Tightening widened dealer spreads for funding intermediation.