The $48 billion question is what slow liquidity means for you

21 July

“Flat Liquidity”. Copyright 2026. nextlevelcorporate. nextlevelcorporate prompts, AI image.

TL; DR

We tend to think of liquidity as either a flood or a drought, but today, it's neither.

It's a tap that's been deliberately left running. And since December 2025, the U.S. Federal Reserve (Fed) has quietly added ~US$289 billion of net liquidity to the financial system, or roughly US$48 billion every month.

Compared with the US$300 billion-plus monthly torrent unleashed during COVID-era quantitative easing, that hardly sounds market moving and it probably explains your recent investment portfolio returns.

But context changes everything, and the question isn't whether the Fed is adding liquidity. It is whether this amount is enough to matter.

Like most things in markets, the answer is yes, and no, and this duplicity has important implications for your corporate development and investing strategies.

Let’s dig in.

First, what this number actually is

Let's start by clearing away any potential misconception. This isn't a new stimulus program, it’s simply the TIFFIT-QE Infinity train to nowhere throttling down to a gentle coast on flat ground, for a time.

What do I mean by that? When the Fed halted Treasury balance sheet runoff on 1 December 2025, it also restarted Reserve Management Purchases under the Reserve Management Program, or RMP, which I’ve written about extensively in my TIFFIT (Treasury is Fed, Fed is Treasury) work.

Despite the “notQE” vibe of the RMP, its objective is straightforward. The Fed is simply making sure reserves in the banking system don't drift below what regulators regard as "ample", which is generally around 8-11% of GDP.

Think of it like maintaining the water level in a dam. Nobody notices when the pumps are quietly keeping the dam topped up. They only notice when the water starts disappearing. And at ~US$40 billion a month, rising to an effective US$55 billion once mortgage-backed security reinvestments are included, today's liquidity growth sits comfortably within the range the Fed itself intended.

Annualised, that's about 9% growth in net liquidity, faster than nominal GDP, but much closer to the Fed's 2019 not QE episode, than the extraordinary intervention that followed in 2020.

Hence your recent portfolio returns, particularly if you’re passively investing and not rotating form old leaders into new leaders 😉

In other words, this isn't the Fed at full throttle. Rather, it’s maintaining the vibe to ensure the engine doesn't stall.

Still, the most important point is that none of this is a surprise. Markets rarely struggle with information everyone already knows, they struggle when the facts change. And today's liquidity figures tell us the Fed is doing exactly what it said it would do.

Bond yields more of a breeze, than a hurricane

If the Fed is quietly adding demand for Treasuries, shouldn't bond yields be falling?

It's a fair question, but the answer is that the Fed is only one participant in a much bigger market.

Imagine trying to fill a pool with a garden hose while someone else is draining it with a fleet of industrial pumps. The hose is definitely adding water, but your eyes are naturally drawn to the bigger flow.

That's today's Treasury market. The RMP is steadily absorbing Treasury bills, while the recently finalised eSLR reforms are gradually allowing banks to hold another US$200 to US$400 billion of government bonds without attracting additional capital charges. JPMorgan has already adopted the new framework ahead of many of its peers, and other global systemically important banks are expected to increase Treasury holdings as 2026 unfolds. Go back and read my work on TIFFIT if you would like a refresher.

Ordinarily, that combination would be supportive for bond prices. But today the complication is that Washington is still borrowing at an extraordinary pace. Treasury issuance, deficit financing and each quarterly refunding decision continue to dwarf the incremental demand created by RMP purchases. The liquidity tap is running, but fiscal policy is asking the market to drink from a much larger fire hose.

The practical implication is that liquidity should lean gently against yields moving materially higher, but it probably isn't powerful enough to trigger a sustained bond rally on its own. Investors would be better served watching the Treasury's next refinancing announcement than obsessing over another month of predictable balance sheet growth.

Equities have enough fuel to idle, but not to power uphill

Liquidity has earned something of a mythical reputation since 2020. Whenever markets rally, someone usually points to the Fed's balance sheet. Whenever they fall, someone else blames tightening liquidity.

But the reality is nuanced. Liquidity matters most at the extremes. Flood the system with money and risk assets usually respond. Drain liquidity aggressively and markets tend to notice. Still, between those two poles sits a wide middle ground where liquidity quietly supports the backdrop without dictating market direction.

That's where we are today, which is to say that adding around US$48 billion a month is more like topping up the fuel tank than fitting a Starship rocket engine. It keeps the engine running smoothly, but it doesn't determine where the vehicle is heading.

That leaves equities reacting to the forces that genuinely drive valuations. Corporate earnings remain the primary driver, interest rate expectations and the level of Federal debt refinancing continue to influence discount rates, the AI infrastructure investment cycle is still reshaping capital allocation, and investor musing over how many data centres are enough as well as geopolitical developments, can alter investor sentiment almost overnight. As can Ukraine, Russia, Israel and Iran especially while the White House battles for strategic minerals and supply chain certainty.

And here in Oz, we’re getting to the top of the interest rate cycle with inflation remaining the final shoe to fall before the next cycle starts, perhaps some time in 2027.

Against those influences, today's liquidity backdrop looks less like the main event and more like a holding pattern while geopolitical, sovereign debt and other issue resolve, and liquidity increases when the resolution finally results in a weaker USD.

Precious metals are listening to a different conversation

Gold has always been a difficult asset to explain because people often try to find a single reason for its movements.

There rarely is one. Gold is responding to a range of forces, including real interest rates, USD strength, central bank buying and geopolitical risk. In this cycle, those conversations have become even louder as central banks continue diversifying reserves while investors consider persistent geopolitical uncertainty.

Against that backdrop, a US$48 billion monthly liquidity increase barely gets a look in.

Instead, the most important variables remain real yields, which ultimately determine the opportunity cost of holding gold, silver, platinum, etc., and the geopolitical premium flowing from the conflict involving Iran and the continued disruption around the Strait of Hormuz. Those developments influence inflation expectations, oil prices and safe-haven demand all at the same time.

China buying? Sure, but that’s more about converting Treasuries and USD to hard money that can’t be confiscated, following U.S. sanctions and confiscations of Russian holdings.

Liquidity still (and always) matters, but right at this geopolitically fuelled moment it’s simply not the loudest voice in the room. Real yields are.

Flat isn't calm

That brings me back to last week's Flatliners article.

The 10-year Treasury yield barely moved, rising just four basis points after June's CPI release. On the surface, nothing much appeared to happen. A nothing burger. But underneath, three powerful forces were wrestling for control.

Softer inflation data pulled yields lower. “No dot” Warsh's hawkish testimony and Governor Waller’s comments pushed them back up. Renewed strikes around the Strait of Hormuz pushed them higher again as markets priced a larger inflation risk premium. That said, currently, its odds on for a Fed on pause in July.

Flat wasn't calm. It was equilibrium. Three forces pulling with almost equal strength until, almost by accident, they cancelled one another out.

The same framework helps explain today's liquidity picture. RMP purchases are quietly adding reserves while Treasury issuance and movements in the Treasury General Account continue draining them. And the Reverse Repo account sits at around $100,000. Not a typo.

At the same time, banks are only beginning to deploy the additional balance sheet capacity created by eSLR reform and the $2.1 trillion that the relaxed requirement might add is far away from materialising. None of those flows are standing still, but together, they create a liquidity backdrop that appears stable.

Sometimes the calmest surface hides the strongest currents.

The bottom line

So, what should investors take away from all of this?

The first is that US$48 billion a month is neither a liquidity surge nor a drain. It’s simply the Fed doing the plumbing required to keep reserves comfortably ample. It’s the TIFFIT QE Infinity train at coasting speed. That's important for stability, but it’s not the kind of policy shift that suddenly changes the investment landscape.

The second is that the bigger market drivers still lie elsewhere. Treasury issuance will continue driving bond yields more than predictable RMP purchasing despite it being net liquidity-positive, while equities remain sensitive to earnings, discount rates and the AI investment cycle than to a modest increase in bank reserves.

Gold continues to be influenced by real interest rates (the yield-penalty for holding gold), central bank demand, and geopolitical uncertainty rather than from incremental changes in Fed liquidity.

And the most useful lesson is also the simplest. Markets don't reprice yesterday's news. They reprice tomorrow's surprise. Since the liquidity tap has been left running exactly as the Fed promised it would, the next meaningful move is far more likely to come from changes in Treasury issuance, the pace at which banks deploy their new eSLR capacity, developments across Hormuz, or the direction of the Fed's leadership transition, than from a monthly liquidity figure everyone has already pencilled into their models.

What this means for your corpdev and investing strategies

Corporate strategy has a habit of becoming easier when you stop trying to predict every market move and instead look at the secular trend while acknowledging there will be cyclicality along the way.

Today's answer, while not calm, is secularly clear.

Capital is likely to remain more expensive than many businesses became accustomed to during the decade after the GFC. Fed Chair No dot Warsh has repeatedly emphasised that persistently elevated inflation will not be tolerated, and with the Fed's strategic review continuing until year end, there is little reason to build transactions around the hope of imminent big rate cuts. That said, in the past week or so there’s been less reasons to expect a hike. So, it feels like we might get a pause unless the war in Iran really heats up and the back end of the Treasuries curve sees yields rise even further.

Businesses underwriting acquisitions, refinancing debt or assessing long-dated capital projects would be well served to use conservative discount rates and allow a wider margin for financing costs. If rates fall sooner than expected, that becomes upside rather than disappointment.

At the same time, renewed disruption around the Strait of Hormuz reminds us that energy markets remain vulnerable to geopolitical events that have nothing to do with monetary policy. Businesses with significant exposure to fuel, freight or fertiliser/petrochemical inputs should continue stress testing margins against higher energy prices rather than assuming recent volatility will quickly disappear. But since Iran has found other ways to get its oil out, supply shocks are more likely to affect fertilisers, chemicals and food, and hence why Fed Chair No dot Warsh is concerned about inflation remaining elevated, as is our Reserve Bank Gov.

Currency markets present the same sort of challenge. Higher oil prices generally strengthen Australia's terms of trade and support the Australian dollar but counteracting that are weak China steel and property markets as well as a higher rate of self-sourcing iron ore and Simandou effects. Fortescue’s corpdev response to this is to diversify, and this was seen recently with an investment in Tungsten. While any future dovish shift by the Fed would weaken the USD from the opposite direction. Those forces may reinforce each other or largely offset one another depending on timing. And that makes flexible hedging strategies more valuable than attempting to forecast a single AUD/USD exchange rate months in advance. Good luck with that.

For investors, the broader message is equally straightforward. Liquidity is no longer doing the heavy lifting. That places greater value on identifying businesses benefiting from secular tailwinds, rather than relying on a broad liquidity-driven re-expansion in market multiples which might be some weeks or months away. The AI infrastructure build-out remains one key theme, although it’s not a straight line up for chip, energy or capital plant companies. There are always cyclical and rotational amplitudes in the road to Elysium.

At the same time, the strategic case for gold continues to rest predominantly on geopolitical uncertainty and the penalty of holding during periods of higher real interest rates. If those two forces are eventually joined by a genuinely dovish Fed (in coordination with a heavy Treasuries issuing Treasury) and a weaker USD, the outlook for precious metals and crypto strengthens further, and those buying now should do well. Until then, get your diamond hands out as we slowly grind to the right.

See you in the market 🖐

Mike

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Michael Ganon