Liquidity in the U.S. financial system is dropping sharply. The Federal Reserve’s reverse repo operations (RRP) — a key tool for managing excess cash — plunged to just $28.8 billion on Thursday, the lowest level since April 2021. Only 14 participants took part in the program, marking the smallest number in more than four years.

Why Money Is Leaving the Fed

The main reason is the aggressive issuance of short-term U.S. Treasury bills by the Treasury Department. The goal is to replenish the government’s cash reserves, but this comes at the expense of draining liquidity from the RRP facility. Investors are pulling money from the Fed and moving it into these new government bonds, which offer more attractive yields.

At the end of July, the RRP still held over $214 billion. If the current pace continues, analysts at Citigroup warn that the balance could drop to zero by the end of August.

Risk to Bank Reserves

Once RRP balances run out, the impact usually shifts to bank reserves — a crucial buffer for the stability of financial markets. Currently, they stand at about $3.3 trillion, which is still a safe range, but the $2.7 trillion minimum threshold identified by Fed Governor Christopher Waller is getting closer.

A shortage of reserves could make it harder for the Fed to continue quantitative tightening and limit its ability to respond to economic shocks.

Zervos and Sumerlin Push the Fed

Amid this backdrop, David Zervos, chief market strategist at Jefferies, has once again called for a 0.5 percentage point rate cut. He argues that a swift move could prevent a slowdown in the labor market and create up to one million new jobs. He has the backing of economist Marc Sumerlin, who has criticized the Fed for being too cautious in its response to inflation.

Zervos is even being mentioned as a potential successor to Jerome Powell. He believes the Fed needs more people with deep market expertise, not just traditional economists.

Trump’s Pressure and Radical Proposals

President Donald Trump, meanwhile, is openly urging the Fed to slash rates by 300 basis points (3%), which would bring the federal funds rate down sharply from its current 4.33%. While Zervos does not advocate such an extreme move, he does not rule out cuts of up to 200 basis points, especially if new technologies and artificial intelligence begin to have a disinflationary effect.

Zervos says he is unfazed by Trump’s frequent attacks on the central bank: “You take the job knowing you’re part of the political process. The important thing is to keep the debate based on facts and on what’s best for meeting Congress’s mandates.”

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