Michael Burry warns of banking fragility as Fed resumes Treasury purchases

Michael Burry, the renowned investor from 'The Big Short,' has identified what he believes is another troubling indicator within the US financial system. He specifically highlighted a technical comment from the Federal Reserve's Wednesday meeting stating that the FOMC believes reserve balances have fallen to 'ample levels' and that the central bank would begin 'reserve management purchases.' This means the Fed will start continuously buying short-term US Treasury bills beginning December 12, at a rate of approximately $40 billion per month, to increase liquidity in markets and the banking sector. While distinct from quantitative easing—which targets long-term Treasuries to suppress borrowing costs—these purchases similarly boost the money supply in the short term, helping banks meet reserve requirements. Burry contends that the mere necessity of this support is alarming, suggesting a system that cannot operate without over $3 trillion in Fed reserves is fundamentally fragile, not strong. He expressed avoiding bank stocks in favor of cash and Treasury funds. Despite this caution, stock markets rallied on the news, with analysts noting this marks the Fed's first significant balance sheet expansion since ending QE in 2022.