Signal 1:
The Event: Morgan Stanley published analysis on February 9 confirming that post-2008 regulatory architecture LCR requirements, stress test buffers structurally prevents the Fed from shrinking its balance sheet back to pre-pandemic levels.
The Number: The Fed balance sheet sits at roughly $6.6 trillion, down from the $9 trillion peak, with the reduction driven almost entirely by RRP decline not actual asset runoff. MBS holdings, at current prepayment speeds, would take approximately ten years to halve.
The Tresy Take: I've been saying the RRP drain is the illusion of tightening. Now Morgan Stanley is saying it in a research note with their name on it. The balance sheet didn't shrink because the Fed sold assets. It shrank because money market funds pulled cash out of the reverse repo facility and redeployed it. That's not quantitative tightening. That's a liquidity reshuffle between line items. The ample reserves regime isn't a policy choice anymore it's a structural requirement. Banks cannot function under current regulations without holding elevated reserves, which means the Fed cannot meaningfully reduce its footprint without triggering the very rate volatility it exists to suppress. The math doesn't negotiate. The Fed's balance sheet has a floor, and we're closer to it than most investors realize.
Signal 2:
The Event: The Fed's H.4.1 release on February 5 showed reverse repurchase agreements at $326.9 billion, continuing their grind lower from 2023 peaks above $2 trillion.
The Number: RRP balances at $326,859 million as of February 4, 2026. Deposits simultaneously rose $79.7 billion week-over-week to $4.09 trillion.
The Tresy Take: This is the number I watch before anything else. The RRP facility was the system's liquidity buffer the cushion that absorbed trillions in excess cash without forcing it into risk assets. That cushion is nearly gone. We've gone from $2 trillion in padding to $327 billion, and the drain continues. When this facility empties, every dollar of continued QT comes directly out of bank reserves. That's when the plumbing breaks. Not dramatically. Not all at once. The way pipes freeze slowly, then all at once when the temperature drops one more degree. I flagged this six days ago. The trajectory hasn't changed. The buffer is thinner.
Signal 3:
The Event: Federal Reserve notes net of bank holdings rose to $2.38 trillion on February 4, growing $81.4 billion year-over-year.
The Number: Net notes outstanding at $2,380,142 million, up $1,796 million week-over-week and $81,447 million year-over-year per the H.4.1 release.
The Tresy Take: This is the number nobody talks about because it's boring. Physical currency demand keeps growing quietly, organically, relentlessly. Every dollar of increased currency in circulation requires the Fed to hold a corresponding asset on its balance sheet. This is not discretionary. This is mechanical. It means the Fed's minimum balance sheet size keeps rising regardless of policy intent, which means the "normalization" everyone keeps forecasting has a moving target that moves in one direction. The floor gets higher. Follow the liquidity, not the story.
Signal 4:
The Event: The Fed's nominal Treasury notes and bonds holdings dropped $41.8 billion in the week ending February 4, reflecting ongoing passive runoff as securities mature without reinvestment.
The Number: Holdings fell to $3,602,109 million, a single-week decline of $41,837 million. Inflation-indexed bonds fell an additional $31,299 million.
The Tresy Take: A $41.8 billion weekly runoff sounds like discipline. It isn't. It's the scheduled maturity of securities the Fed bought during the panic. The Treasury must now refinance that maturing debt in the open market meaning private buyers need to absorb supply the Fed used to warehouse. That's fine when liquidity is abundant. It gets interesting when the RRP buffer at Signal 2 runs dry. Every dollar the Fed lets roll off is a dollar someone else has to fund. The question isn't whether the runoff continues. The question is who shows up to buy and at what price.
Signal 5:
The Event: Inflation compensation on the Fed's TIPS holdings declined $5.1 billion in the week ending February 4.
The Number: Inflation compensation at $101,527 million, down $5,123 million week-over-week per the H.4.1 release.
The Tresy Take: The market's implied inflation expectations, as embedded in the Fed's own portfolio, are cooling. That sounds comforting. It shouldn't be. Falling inflation compensation changes the collateral profile of the Fed's holdings, alters hedging costs for primary dealers, and shifts repo market dynamics in ways that benefit exactly two institutions the custodial banks running the settlement infrastructure. BNY Mellon and JPMorgan don't care whether inflation runs hot or cold. They care about flow. And the flow just changed direction.
The Bottom Line
The system isn't tightening. It's rearranging. The RRP drains, reserves accumulate, currency demand grows, and the Fed's structural floor rises with every passing quarter. The narrative says normalization. The balance sheet says permanent expansion with better marketing. Watch the RRP. When the buffer hits zero, the next phase of this cycle begins and it won't be the one the consensus is positioned for.
Stay sovereign.