Fed Warns: Markets Could Face a Cash Crunch Even if Rates Stay Unchanged

The minutes from the Federal Reserve’s December FOMC meeting, released on December 30, revealed significant concerns about the liquidity of the U.S. financial system. While interest rates remain stable and the economy appears balanced on the surface, a hidden risk is brewing: the system could suddenly run short of cash.

Biggest Threat: Short-Term Funding The Fed focused especially on short-term funding markets—where banks and financial institutions borrow overnight cash to maintain daily operations. Bank reserves have reportedly dropped to the “adequate” threshold, making the system more sensitive to even minor fluctuations. Warning signs highlighted in the minutes include:

🔹 Rising and volatile rates in overnight repo operations

🔹 Widening gaps between market rates and Fed-controlled rates

🔹 Increasing reliance on the Fed’s standing repo facility Several committee members pointed out that these pressures are mounting more quickly than during the Fed’s previous tightening cycle (2017–2019), suggesting that current conditions could deteriorate at a much faster pace. Seasonal stressors such as spring tax payments and end-of-year liquidity demands could drain reserves even further. According to projections, reserves may drop below the Fed’s comfort zone—triggering ripple effects across the overnight markets.

Fed’s Response: Treasury Bill Purchases To prevent this risk, the Fed is considering resuming purchases of short-term Treasury securities—not to change the direction of monetary policy, but to maintain sufficient reserves and preserve rate control. Investors expect these purchases could total $220 billion in the first year alone. At the same time, the Fed plans to enhance its standing repo facility—removing usage caps and improving communication so the market sees it as part of the regular toolkit rather than an emergency fallback.

What’s Next? The current federal funds rate target range stands at 3.50% to 3.75%. The next FOMC meeting is scheduled for January 27–28, 2026. According to the CME Group’s FedWatch Tool, traders see an 85.1% probability that the Fed will hold rates steady, with only 14.9% expecting a quarter-point cut.

#Fed , #interestrates , #fomc , #JeromePowell , #FederalReserve

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