Triple Pressure from the Federal Reserve, Treasury, and Congress; Goldman Sachs: Liquidity Crisis May Occur in 2027

Triple Pressures from the Federal Reserve, Treasury, and Congress—Goldman Sachs: Liquidity Crisis Expected in 2027

The U.S. money market is quietly approaching a tipping point. A recent research report from Goldman Sachs warns that bank reserves are already at the edge of the steep part of the demand curve, with triple pressures from the Federal Reserve, Treasury, and Congress to be unleashed in the second half of 2027. At that time, the repo market faces the risk of intense volatility.

Goldman Sachs rate strategist Isabella Rosenberg pointed out in her latest report released on November 10 that system liquidity is currently “just sufficient to keep everything looking normal, but not enough to withstand any unexpected shocks.” The report anticipates that the rebuilding of the Treasury General Account (TGA) triggered by the debt ceiling in 2027 will coincide with larger-scale Treasury auctions, follow-on effects from forced repo liquidations, and stagnated growth in money market funds, all stacking up to create multiple tightening pressures.

Meanwhile, the Federal Reserve is currently in a rare policy paradox: within the same month, the Fed is expected to restart purchases of short-term Treasury bills (T-bills), while Fed Governor Waller has openly signaled a 50 basis point rate hike. The December rate hike is fully priced in by the market, with the 2-year Treasury yield jumping to 4.61% before the CPI data release. Goldman Sachs predicts the Fed will start cutting rates in the second half of 2027, a window that coincides with the peak of liquidity risks.

Reserves at the Brink, Despite Surface Calm

In 2026, the repo market overall remained stable. According to Goldman Sachs data, the Secured Overnight Financing Rate (SOFR) has consistently traded about 2 basis points below the Fed’s Interest on Reserve Balances (IORB) since May, while the Tri-Party General Collateral Rate (TGCR) has averaged about 4 basis points below the IORB. Goldman’s models show that since the second half of the year, funding costs have even fallen below levels implied by fundamentals.

Rosenberg attributes this calm to several factors working together: reserve balances fluctuating within a range, reduced funding demand, banks’ greater willingness to use the Fed’s Standing Repo Facility (SRF), and regulatory changes such as the eSLR revision and secured repo improving dealers' intermediation capacity.

However, Goldman Sachs' scatterplot reveals a key risk: at similar reserve levels (in the 11%-12% range), the system has previously seen repo rates rise as much as 13 basis points above IORB (i.e., tight liquidity in Fall 2025) and also seen relaxed conditions with rates 2 to 9 basis points below IORB. The same liquidity level can yield opposing outcomes. Goldman describes the current reserve level as “at the edge of the steeper part of the demand curve,” meaning the system is equally close to either extreme outcome.

Currently, reserves account for about 11% of bank assets, below the roughly 14% when the 2025 liquidity squeeze began, and only slightly above the lows of 2019.

Federal Reserve: Rate Hikes with One Hand, Bond Buying with the Other

The current Fed policy paradox: expected to restart T-bill purchases in November, while the market has fully priced in a December rate hike.

Goldman Sachs expects the Fed to restart its Reserve Management Purchase (RMP) program this month at a scale of about $1 billion/month, maintaining this until Q1 2027 and then ramping up to about $2.5 billion/month from Q2 2027—this pace is estimated to be necessary to keep the reserve-to-asset ratio of banks stable.

Including reinvestment of maturing MBS funds in T-bills, Goldman estimates the Fed’s total monthly T-bill purchases will rise from about $2 billion in winter to about $4 billion after April. The RMP alone will add about $255 billion to reserves in 2027.

Goldman also makes it clear that the Fed is unlikely to restart Quantitative Tightening (QT) just because funding conditions are temporarily easy. The report points out that liquidity easing from the drop in the TGA during the debt ceiling period is short-lived; once the ceiling is lifted and TGA is rebuilt, liquidity will quickly reverse, and funding costs will face upward risk.

On a longer-term path, Goldman assumes the Fed will continue buying T-bills until their share in the Treasuries portfolio reaches a market-neutral level, expected around 2028.

Treasury: $1.1 trillion in T-bills—Where Are the Buyers?

Goldman Sachs forecasts US net bond supply will rise slightly from $2.1 trillion to $2.2 trillion in 2027, but with a tilt toward the short end: net T-bill issuance will increase about $200 billion to $1.1 trillion, and the portion that non-Fed buyers must absorb will rise from about $480 billion this year to about $600 billion.

The issue is that the natural buyers of T-bills—money market funds—have seen growth stall. In 2024 and 2025, money fund net inflows reached about $800 billion each year; but after July this year, inflows have flattened, with only about $250 billion for the full year.

Goldman explains this as strong risk-asset returns and higher long-yield rates have drawn money into long-term bond funds. Even with recent equity market volatility, investors prefer to extend duration rather than shift to cash. In addition, money funds, concerned about Fed rate hikes, have proactively shortened their Weighted Average Maturity (WAM), weakening demand for 3-month and 6-month T-bills issued by the Treasury.

The report notes that after Waller signaled a 50 basis point hike, funds’ incentive to keep a short duration increased further. The T-bill vs. OIS spread has therefore widened, and Goldman believes this trend is not over.

In Treasury issuance, Goldman expects auction sizes to expand starting August 2027, focusing on 2- to 10-year maturities, with the long end unchanged or slightly reduced.

Congress: Debt Ceiling Is the Biggest Uncertainty

Goldman Sachs expects the $41.1 trillion debt ceiling to be hit in Q1 2027 (most likely February). After that, the Treasury cannot issue new net debt and can only operate by spending down the TGA balance and redeeming T-bills. Every dollar spent from TGA will be injected into the banking system as reserves.

Looking at the last three debt-limit episodes, the TGA dropped by an average of $400 billion from the time the ceiling was hit until a deal was reached. Goldman estimates that this TGA drop, along with a corresponding reduction in T-bill supply, will exert about 4 basis points of downward pressure on SOFR (about 1 basis point for each $100 billion). Since the Treasury’s cash balance reached nearly $1 trillion in August this year, a higher starting point implies an even larger potential drop.

Thus, the spring and summer of 2027 may see an unexpectedly easy funding environment: reserves increase, T-bill supply falls, repo rates further below IORB.

However, with Democrats expected to take both chambers of Congress in January, the market anticipates protracted debt-ceiling negotiations, with the so-called X date forecast for Q4 2027. BMO’s Vail Hartman warned after the election, “Financial markets may be in for a long, drawn-out debt ceiling stalemate, risking sovereign rating downgrades, price distortions around the X date, and increased volatility in cash and repo markets.”

Once the ceiling is lifted, the Treasury will rebuild its cash balance by issuing large amounts of T-bills, reversing the entire process: reserves plunge, T-bill supply surges, repo rates spike. Goldman notes that broader use of the SRF and clearer understanding of what constitutes “ample reserves” can help cushion the impact, but not eliminate it.

Historical Precedent: Two TGA Rebuilds, Two Crises

Goldman cites two historical cases, both showing that TGA rebuilding when reserves are low triggered systemic shocks:

• 2019: The debt ceiling was suspended in early August; the Treasury immediately rebuilt its cash balances, causing overnight repo rates to soar to 10% on September 17. The Fed, already in an easing cycle, launched monthly T-bill purchases of $60 billion in mid-October, calling it “not quantitative easing.”

• 2025: The debt ceiling was raised in July; the Treasury rebuilt its cash balance, and on October 31, banks drew a record $50 billion from the SRF. The Fed ended QT, cut rates three times that year, and in December began $40 billion/month in T-bill purchases.

Both episodes ended with the Fed cutting rates and expanding its balance sheet within months of the TGA rebuild, and in both cases, officials had previously claimed reserves were ample.

Two Prediction Lines Pointing to the Same Event

Goldman Sachs economists forecast the Fed will start cutting rates in the second half of 2027, bringing the federal funds rate back to the 3.25%-3.5% range through three cuts by early 2028, citing inflation, oil prices, and AI-related factors.

However, this rate cut timeline largely overlaps with Rosenberg’s liquidity calendar: TGA rebuilding, T-bill supply surge, larger Treasury auctions from August, follow-on effects from forced liquidations, and stagnated money fund growth—all occurring within the same window.

Goldman’s report concludes that Fed policy should still serve as a stabilizing force for funding markets at that time, but “the path may be bumpy, with various obstacles encountering along the way and funding tightening risks increasingly accumulating in the latter part of the year.”

Of note, if the Fed is still grappling with core CPI and reluctant to respond to repo market disorder with rate cuts, then the first steps of a new easing cycle may not appear in the federal funds rate but rather in a quiet expansion of T-bill purchases—the predicted $25 billion per month by Goldman could well be just the floor.