Since mid-April, the Fed has withdrawn ~$140B of liquidity from financial system
So here&#x27;s what&#x27;s happening for anyone who wants more context.<p>The US Treasury issues debt (called Treasuries) to fund US government operations.  The US Treasury is a &#x27;traditional&#x27; part of the US government and its debt is considered as close to &#x27;risk-free&#x27; as you can get today (some combination of the US government&#x27;s ability to indefinitely tax the largest&#x2F;most advanced economy in the world + the US military are the two things cited as to why this is true).<p>The US Fed is a less traditional part of the US Government.  It is technically a bank that the government owns, but voters have no direct means of influencing policy.<p>Previously, The Fed would &#x27;manage&#x27; the behavior of private banks by either controlling the money supply (an increasingly abstract concept in the age of digital money) or adjusting the super short-term interest rate at which it loans money to banks who need it in a pinch (increasingly less relevant for a variety of factors). They actually transacted very little with the Treasury in this period.<p>In 2008, The Fed found that neither of their tried and true tools was good enough to get private banks to lend more money than they were doing at the time (you&#x27;ll hear a lot of hand-wringing about the 0 lower bound of interest rates, despite some interesting outcomes from negative interest rates in other countries).  In order to do <i>something</i>, the Fed decided to just straight up buy US Treasuries (something Japan had pioneered before; they also buy Mortgage-backed Securities, but don&#x27;t worry about that right now).<p>This decision (known as Quantitative Easing because economists love to pretend like they&#x27;re scientists) has the net effect of making the Treasuries more expensive, and their interest rates lower.  This is because Treasuries are sold with a fixed coupon rate (i.e. I&#x27;ll give the owner of this Treasury $5&#x2F;month) and a floating face value (i.e. I&#x27;ll pay a variable amount of money depending on current risk conditions to own the Treasury that pays me $5&#x2F;month risk-fee).  When the risk-free interest rate is low, people tend to look to riskier places to generate yield, and therefore lend money more liberally.<p>This change is important because it went from the Fed influencing a relatively esoteric, bank-only interest rate to the Fed controlling the most important interest rate in the world (it&#x27;s one of the most common baselines used for determining other interest rates).<p>Long story short, The Fed wants that interest rate to go back up, so what are they doing? They are <i>no longer buying new Treasuries to replace their existing Treasuries that reach maturity, to the tune of $90bn per month</i><p>Is that <i>removing liquidity</i>? Not really, it&#x27;s just decreasing the active injection of liquidity that the Fed has been doing for the past 15 years.<p>Does the nominal amount of money on the Fed&#x27;s balance sheet matter&#x2F;should we strive to bring it to $0? Unclear - what does it even mean for the US government to own its own debt? As long as markets don&#x27;t care (they seem to not care right now out of convenience) then it&#x27;s all fine, I guess?<p>Will the Fed ever actively sell its Treasury holdings? Probably not, because they are happy with the tense equilibrium I mentioned above and they don&#x27;t want to risk breaking that.<p>What&#x27;s the best KPI to watch? As long as new Treasuries sell  (at auction) at around the Fed&#x27;s desired interest rate, this is a non-problem and we can sort of ignore it.  As soon as the Treasury market breaks (A lot of varying opinions here), then this is the world&#x27;s biggest problem ever and we will look back at how foolish we were (just unclear if that will ever happen).