Trump’s latest U-turn is arguably the best worst-case scenario for risk assets. Why? Because up until yesterday’s announcement, the most likely path forward involved a forced and reactive Fed intervention—stepping in to provide emergency liquidity in a worst-case scenario where funding markets completely broke down.

The Cracks Were Already Showing

Even before the April 2nd tariff announcement, liquidity conditions were fragile. The clearest indication came during the most recent FOMC meeting, where Powell and the Fed took a noticeably more cautious tone, opting to slow the pace of quantitative tightening (QT). That pivot signaled a growing awareness within the Fed that market plumbing was under increasing strain.

Compounding this fragility was the fact that the U.S. had effectively hit the debt ceiling. As a result, the Treasury was forced to draw down its Treasury General Account (TGA) to continue funding operations. Historically, these drawdowns inject reserves into the banking system—temporarily easing liquidity pressures. But as seen in 2023, this effect can quickly reverse when the debt ceiling is resolved and the Treasury moves to rebuild its cash buffer, draining reserves rapidly. With reserves now just modestly above the minimum threshold needed for smooth functioning, Fed officials had good reason to fear a renewed bout of volatility. A debt ceiling episode could bring forward an end to QT, but only by a few months—not a structural shift, just a reprieve.

Chart 1: TGA is nearly fully depleted, now we’ve got to focus on the replenish part