Ample liquidity on its way as the TIFFIT-QE Infinity train to nowhere takes on more wood while the new tag team forms

TL; DR

Markets are not confused. They are reacting to plumbing.

Over the past two years, the U.S. financial system had a cushion. That cushion was operated by the Federal Reserve. It is formally known as the reverse repo facility, but it’s easier to think of it as a “parking lot” — a place where excess cash from large money market funds could sit safely and earn a modest return.

When the U.S. Department of the Treasury rebuilt its main cash balance, effectively the government’s checking account called the TGA, it issued short-term debt, known as Treasury bills, to raise that money.

In a normal setting, that process would pull cash out of the banking system and tighten financial conditions.

But instead of draining banks, much of the money simply moved out of the parking lot and into Treasury bills. It was largely a reallocation, not a true withdrawal of liquidity. Bank reserves were not materially reduced. The system barely felt the shift.

Now the parking lot is mostly empty.

Without that buffer, future Treasury borrowing will not be absorbed as smoothly. A different source of liquidity will have to step in. When it does, it will change how money flows through the system, and that will influence how risk markets behave.

Let’s walk through what that shift means.

How the shock absorber used to work

Think of it like this. When the government needed cash, the U.S. Department of the Treasury would:

Sell short-term IOUs (Treasury bills).
Cash-heavy money market funds would buy them.
The money to buy them would come out of the Fed’s “parking lot,” the money pool run by the Federal Reserve, which in December 2022 held $2.55 trillion.
That money would move into the government’s main account which you can think of as the government’s “come and go” facility.
The balance in that account would rise as new borrowing and tax receipts came in.
Bank cash levels (reserves) would stay broadly steady.

The key point is that money moved, but it didn’t vanish. It shifted from the parking lot to government bills. Banks were largely unaffected. Liquidity was recycled, not removed. That allowed markets to rise even while the government was borrowing heavily.

What changed

Over the past year, heavy bill issuance drained the parking lot. It emptied. Today, it stands at $370 million, near empty.

And when the government’s “come and go” account started rising again, and stayed high due to slower spending during shutdown dynamics, there was no cushion left to alleviate that tightening.

This time:

The government account rose (up nearly $115 billion since the beginning of the year to $915 billion now).
The parking lot was already near empty.
The adjustment came out of the broader banking system instead.

Liquidity did not recycle. It tightened. Not dramatically. But enough to stall momentum.

That is why markets are moving sideways.

Liquidity flows define the new system

From here, liquidity depends on three main channels.:

The Fed’s Reserve Management Program is adding ~$40 billion per month into bank reserves, keeping the “infinity train” on its tracks. It’s helpful, but not powerful enough to move the liquidity needle.
Balances in the Treasury’s main account have increased, based on the latest data, despite the end of the government shutdown. This means an additional $115 billon is being heldback from financial markets, thereby reducing liquidity.
The upcoming changes to leverage rules for the largest U.S. banks will allow them to buy government bonds more easily and in larger size. This is where my TIFFIT framework comes in, i.e., coordination between Treasury and the Fed to keep liquidity moving. If the rule changes go ahead as expected (1 April 2026), the eight largest U.S. banks alone could free up over $2 trillion in buying capacity, allowing them to absorb government debt directly, effectively replacing the Fed’s parking lot as the liquidity shock absorber.

This is not a dead cat bounce

A dead cat bounce suggests the economy is weakening underneath the surface.

That is not what we are seeing today.

Corporate earnings have not collapsed. Credit markets are not flashing systemic stress.

Unemployment remains low. Inflation has been trending down, even if tariffs cause temporary noise.

The economy is broadly stable.

But what has slowed is liquidity momentum, and when:

the government’s cash balance sits above $915 billion;
the parking lot is nearly empty at $370 million;
the Fed’s monthly injections are modest $40 billion per month;
regulatory easing has not yet kicked in; and
bank reserves are flat,

risk assets lose propulsion.

This is an air pocket, not structural decay.

Put differently, the system is temporarily absorbing liquidity rather than spreading it.

Why sideways rotations make sense here

With the parking lot largely depleted, the government’s account elevated, and regulatory easing still pending, markets are waiting for spending and liquidity to accelerate again.

Too tight for a sustained rally. Not weak enough for a collapse.

That produces chop and frustration, causing a sideways move.

Questions over AI capex spending and the next industry it will disrupt also do not spell collapse, well not at the moment anyway. What they do lead to is rotation from industry to industry and assets class to asset class as investors choose different ways to express how they see this all developing.

What breaks the sideways pattern? My TIFFIT framework

Under my TIFFIT framework, coordinated policy between Treasury Secretary Scott Bessent and future Fed Chair Warsh (assuming he is confirmed) is what will most likely support liquidity injection and risk-on.

Here’s the simple version of how the new shock absorber would work assuming the regulatory rule changes kick in on 1 April 2026:

Banks buy Treasury bonds directly, using available cash.
Government receives that cash into its account.
Government spends it.
Spending flows into businesses and households.
Bank deposits rise.
Banks have more room to lend.
Lending, activity, and asset prices strengthen and more money created.

Instead of cash sitting idle in a Fed parking lot in the form of reserves, liquidity would circulate through commercial banks.

In short, the cushion moves from the Fed to the banking system itself. This is the new shock absorber.

The bottom line

This market is not drifting because it lacks conviction, or because Claude just ate software, or hyperscalers have to spend around $1 trillion just to survive AI.

It is pausing because the old shock absorber, i.e., the parking lot, has been depleted.

On top of that there has been rotation out of tech into metals and energy, and in certain cases we’re seeing profit-taking. So not all investors are being affected in the same way.

Nonetheless, once banks begin absorbing Treasuries more freely (post-April) and government spending circulates back through deposits and lending, liquidity momentum is likely to return.

And if earnings remain stable, the path of least resistance for risk assets is higher.

So, watch the flows. They will write the next chapter.

See you in the market 🖐

Mike Ganon

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Markets are going sideways because the shock absorber isn’t working