Why the Fed Still Has Room to Keep Raising Rates

Starting around 2019, a phrase that caught on among U.S. stock investors was the term “Powell put.”

A put option is the right to sell a stock at a pre-agreed price at a specific point in the future. The “Powell put” is a tongue‑in‑cheek way of describing the phenomenon where, whenever the market falls, Fed Chair Jerome Powell steps in with rate cuts and quantitative easing (QE) to prop up stock prices.

With the Nasdaq, Dow Jones Industrial Average, and S&P 500 all sliding day after day recently, investors are once again talking about this so‑called Powell put—whether as hope or desperation. But it’s important to be clear: the direction of the stock market is not something the Federal Reserve considers a policy target.

So what indicators does the Fed actually care about?

In short, overall market liquidity—in other words, whether banks have plenty of cash.

How can we tell if banks have enough cash on hand?

One way is to look at deposit rates—the interest banks pay customers to park cash with them. My own Bank of America checking account currently pays 0% interest. If banks were short of cash, they would raise deposit rates to attract more funding. The fact that deposit rates are still at 0% suggests banks are not having trouble raising funds. In fact, U.S. banks often complain they are drowning in too many deposits—but that’s a topic for another day.

To get a bit more technical, we can look at the reverse repo (repurchase agreement) market. In Korean it’s often called the “reverse repo market,” and put simply, it’s where commercial banks like Bank of America and Chase lend their excess reserves to the Fed overnight.

If you ask what excess reserves are, in simple terms they’re funds that banks don’t currently need but also can’t just use freely. Technically, they are reserves held in excess of the required reserve ratio (in the U.S., historically 10% of deposits).

Now look at this chart (the white line).

Excess reserves have reached 2.3 trillion dollars—about 3,300 trillion won!

This is cash that U.S. banks have piled up but have no immediate use for, so it has flowed into the reverse repo market—and the balance there keeps growing.

Part of this is due to a decline in the supply of ultra‑short‑term U.S. Treasuries, but ultimately it is clear evidence that liquidity in the system is ample.

In other words, there is virtually no sign of an impending credit crunch in the banking system, which in turn means the Fed still has room to keep raising interest rates.

According to a May article from Reuters quoting Lou Crandall, chief economist at money‑market research firm Wrightson, Fed hawks last winter “cited the swollen RRP (reverse repo) balance as a reason the Fed should begin quantitative tightening.” He suggested that if the RRP balance swelled above 2 trillion dollars over the summer, it could be used as justification for starting quantitative tightening earlier than planned. Now that summer has passed, the RRP balance has already blown past 2 trillion dollars.