Where the Money Drained To
The bathtub
Forget interest rates for a moment. Think about a bathtub.
The reserves in the banking system are the water. Water comes in when the central bank buys assets or the government spends. It goes out when the central bank shrinks its balance sheet or the government pulls in more tax than it pays out.
What matters for markets is not the level of the water but which drain it is leaving through.
Three names, one plumbing system
You cannot read a macro piece without hitting these three. They are all accounts where money sits temporarily:
- Reserves — cash banks hold at the central bank. This is the water. Currently about $2.894 trillion.
- The RRP (overnight reverse repo) — a facility where money market funds park cash overnight with the Fed. Think of it as a spare tank sitting above the bathtub. While it has water in it, you can drain the tub without the level falling, because the spare tank refills it.
- The TGA (Treasury General Account) — the government's checking account at the Fed. When Treasury collects taxes, money leaves the banking system and sits here. When Treasury spends, it flows back out. Currently about $844bn.
The spare tank just emptied
For 2 years the RRP absorbed the drain. The Fed shrank its balance sheet, and the money came out of the spare tank instead of the bathtub. Reserves stayed comfortable. Nobody noticed anything.
The RRP is now roughly $4.7 billion. Essentially zero. The buffer is gone.
From here, the drain hits reserves directly. Same policy, completely different consequence — and that is the whole lesson. The rate of tightening did not change. The place it lands did.
How you spot it in the wild
The tell is a spread called SOFR minus IORB.
SOFR is the rate at which banks actually borrow cash overnight against Treasury collateral — the real market price of money. IORB is the rate the Fed pays banks to leave cash on deposit — the administered price.
When reserves are abundant, SOFR sits at or just below IORB. Nothing to see. When reserves get scarce, the people who need cash get desperate and SOFR pops above IORB. That is the plumbing squeaking, and it happens before anything shows up in equities or inflation data.
Right now that spread is mildly negative, at about −3bp. Not stress. But it is the thing to watch, because with the spare tank empty, the next move in that number is the one that matters.
Why a Bitcoin trader should care
Because reserves are the marginal dollar that funds everything. When the water level falls, the last buyers to get funded are the ones holding the riskiest assets. Liquidity drains do not show up first in the S&P; they show up in the funding markets, then the most leveraged corners, then the broader market.
This is also why central banks tend to stop shrinking the balance sheet before the drain causes visible damage. The technical term for stopping is a mouthful — they will say things like "adjusting the pace of runoff." Translate it as: the spare tank is empty and we would rather not find out what happens next.