The mystery of "liquidity tightening" in the U.S. market revealed? JPMorgan withdraws nearly $350 billion from its Federal Reserve account and invests it in U.S. Treasury bonds.

A major asset reallocation by the largest bank in the United States may be shedding light on some of the recent market liquidity tightness.

JPMorgan Chase has recently withdrawn tens of billions of dollars in cash reserves from the Federal Reserve and is instead aggressively purchasing U.S. Treasuries. This strategic move, aimed at hedging against interest rate downside risk, has had a significant impact on system-wide liquidity due to its sheer size, sparking intense market debate about whether the repo crisis of 2019 might repeat itself.

According to the latest data compiled by industry tracker BankRegData, since the end of 2023, JPMorgan has sharply reduced its deposit balance at the Fed from $409 billion to $63 billion in the third quarter of this year, withdrawing nearly $350 billion. Meanwhile, during the same period, the bank’s holdings of U.S. Treasuries soared from $231 billion to $450 billion.

According to analysis by the Financial Times, JPMorgan’s withdrawals are so substantial that they offset the combined flows of more than 4,000 other banks’ Fed deposits across the U.S., making it the decisive factor behind net reserve outflows. Data shows that since the end of 2023, the total deposit balance of all U.S. banks at the Fed has fallen from $1.9 trillion to about $1.6 trillion. This means that, excluding JPMorgan’s actions, total reserves in the U.S. banking system would actually have increased.

This move underscores how the $4 trillion asset giant is preparing for the end of the high-interest rate era. Previously, banks could park cash at the Fed to earn high interest while paying depositors very little, pocketing easy profits. Now, with interest rates falling, JPMorgan is defending its future profitability by locking in higher yields on Treasuries.

Rushing to Beat Rate Cuts, JPMorgan Locks in High Yields

JPMorgan’s asset allocation shift is a direct response to changes in the interest rate environment. According to the Financial Times, the Fed began cutting its target rate range late in 2024 and signaled more rate cuts ahead. This month, the Fed has reduced rates to the lowest level in three years.

Bill Moreland, founder of BankRegData, commented: "It’s clear that JPMorgan is moving its funds from the Fed to Treasuries. Rates are dropping, and they’re getting ahead."

This strategy sharply contrasts with JPMorgan’s approach in the last economic cycle. During the low-rate period of 2020 and 2021, the bank avoided heavy investment in long-term bonds, which allowed it to sidestep massive mark-to-market losses suffered by competitors like Bank of America when rates spiked in 2022. Now, facing a downward rate trend, JPMorgan is taking the opposite approach.

JPMorgan declined to comment and did not disclose the duration of Treasuries held in its investment portfolio, nor details of how it manages risk with interest rate swaps.

“Singlehandedly” Impacting System Liquidity

The scale of JPMorgan’s move is substantial enough to materially impact liquidity across the financial system. Bank reserves held at the Fed are a key "lubricant" for the financial sector, and changes in their total amount are a crucial indicator of market liquidity.

Since 2008, the Fed has paid interest on bank reserves (Interest on Reserve Balances, IORB), making this a vital tool for influencing short-term rates and system liquidity. In the high-rate environment of the past two years, Fed interest payments surged, totaling $186.5 billion in 2024 alone.

However, JPMorgan’s massive withdrawal of funds has directly led to a contraction in aggregate bank system reserves. This significant liquidity shift initiated by a single institution has naturally attracted close market attention and concern.

History Repeats? Market Fiercely Debates the Shadow of the 2019 Repo Crisis

JPMorgan’s actions have led some market observers to recall the “repo crisis” of September 2019. According to a financial blog post by ZeroHedge, current market dynamics bear a striking resemblance to those of the time.

The analysis notes that in 2019, repo rates once soared to 10%, and a major reason behind this was JPMorgan’s drastic reduction of its held cash at the Fed that year. Reuters also highlighted at the time that balance sheet moves by JPMorgan were a chief factor in the market freeze. Ultimately, the crisis forced the Fed to stop shrinking its balance sheet and launch what the markets called “QE Lite”—a light version of quantitative easing.

ZeroHedge’s analysis emphasizes that today’s events look almost identical: as a new Fed easing cycle begins, JPMorgan again makes massive withdrawals of reserves, the market faces liquidity strain, and the Fed has already ended quantitative tightening (QT) and restarted bond purchases. The analysis suggests capital shifts by a single bank can trigger a liquidity shortage and may force the Fed to adopt an even more accommodative monetary policy than planned.

Of course, this direct comparison is still controversial and seen by some as a radical interpretation. But it does offer a cautionary perspective for understanding the current liquidity squeeze.

Interest on Excess Reserves Controversy Rekindled

JPMorgan’s enormous profits and asset shuffling have once again put the Fed’s policy of paying interest on bank reserves back in the spotlight. This practice has long been controversial.

U.S. Senator Rand Paul and other critics argue that the Fed is paying banks hundreds of billions merely to have their money “sit idle” instead of flowing into the real economy. Though the Senate rejected a bill in October prohibiting interest payments on reserves, opposition remains.

In a report earlier this month, Rand Paul noted that since 2013, the top 20 banks receiving Fed interest payments had collected $305 billion in total. JPMorgan alone earned $15 billion in interest from the Fed in 2024, while its total profits for the year were $58.5 billion. These figures have undoubtedly fueled the policy debate.

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