Fed Reserves Drop Below $3 Trillion, Lowest Since 2020
The Federal Reserve’s reserves have fallen below $3 trillion, marking the lowest level since 2020, raising concerns among financial experts.
Federal Reserve, US Banking System, Liquidity, Quantitative Tightening, Interest Rates, New York, USA
New York: So, the Federal Reserve’s reserves have dipped below $3 trillion, which is the lowest it’s been since 2020. This is a big deal for the banking system.
According to the latest data, reserves dropped by about $326 billion in just one week, landing at $2.89 trillion. That’s the biggest drop we’ve seen in over two years!
This decline is happening as banks are tightening up their balance sheets at year-end. They’re cutting back on certain activities to make sure they meet regulatory requirements. So, cash is being funneled into the Fed’s overnight reverse repo facility, which is pulling liquidity from other areas.
Meanwhile, the Fed is also working to remove excess cash from the system through its quantitative tightening program. This is happening while banks are paying back loans from the Bank Term Funding Program.
Wall Street is keeping a close eye on how low reserves can go without causing issues. Some experts think the comfortable level is between $3 trillion and $3.25 trillion. The Fed has been clear about its plans to keep shrinking its balance sheet.
They’ve even adjusted the rates on the reverse repo facility to help keep short-term interest rates in check. Some believe this might help avoid a reserve shortage for a little while longer.
But there’s a lot of chatter about how long the Fed can keep this up without triggering memories of the chaos back in September 2019. Back then, reserves got too low, leading to a spike in key lending rates, and the Fed had to step in to stabilize things.
Recently, the Fed lowered the cap on how much in Treasuries can mature without being reinvested, but it’s still unclear when this program will wrap up.
With the debt ceiling back in play, it’s going to be tricky for policymakers to figure out the right balance. The measures the Treasury takes to stay under the cap can create a false sense of liquidity, hiding signs of reserve scarcity. Interestingly, a lot of market participants expect quantitative tightening to end in early 2025.