That ON RRP balance graph is crazy. Historically it has spiked to around $500 bn, but it always hovers around its normal state of zero. In the aftermath of the 2020 QE, you really see all that excess liquidity just sitting in massive quantities in ON RRP from 2021 to now. I think it's expected to be back to zero around the end of June or so. After that, QT will start removing noticeable liquidity from the markets. I'm no economist, but I've been following the macro picture extensively since the fed pivoted in 2019 (I expected normalization back then) and since QT started, I've been watching for the time ON RRP would be back to zero, since my theory is that's the time we'll start seeing the typical effects of QT. There was so much liquidity injected, we haven't seen the normal effects of QT yet.

This is also total speculation and guessing on my part, but reading between the lines of the fed minutes and remarks by fed officials, I also think the fed is going after employment. I think they are looking for a business cycle recession (we are far overdue, the last was 16 years ago), a "soft landing" that doesn't result in a crash. They don't want major bank failures, they don't want major market blowouts. A "normal" (historically normal) business cycle recession that results in a "normal" uptick in unemployment is probably what the fed is targeting in order to contain inflation and help unlock some of the distortions, such as the massive reduction in volume in the housing market ("lock up effect").

The question is, with these massive amounts of QE and liquidity they have injected over the past decade, is such a result even possible? I don't think anyone knows. But I think they're aiming for a mild business cycle recession, long-term normalization (years of mild QT), and trying to avoid a crisis level crash. But who knows.