$2.93 trillion, this is the latest figure for the Federal Reserve's reserve balance as of the week ending December 18, a sharp decrease of $40.1 billion from the previous week, reaching the lowest point since early December.
This continuously shrinking number on the Federal Reserve's balance sheet has evolved from a technical indicator into the eye of a storm concerning global market liquidity.
The reserve balance in the banking system has declined from about $3.2 trillion at the end of June 2025, accumulating a reduction of approximately $270 billion over six months, and has continued to decline since it first fell below the psychological threshold of $3 trillion at the end of September.
1. Three Years of Quantitative Tightening
The quantitative tightening policy began on June 1, 2022, when the U.S. economy was facing the most severe inflationary pressures in decades.
● The Federal Reserve allowed up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature each month without reinvestment, withdrawing liquidity from the financial system at a maximum scale of $95 billion per month.
● This liquidity contraction process has undergone several adjustments. In June 2024, the Federal Reserve lowered the monthly maturity cap for Treasury securities from $60 billion to $25 billion. By April 2025, the cap was further reduced to $5 billion, while the MBS cap was simultaneously lowered to $35 billion, compressing the monthly balance sheet reduction to below $38.5 billion.
● As of the week ending October 22, 2025, the Federal Reserve's total assets stood at $6.54 trillion, a cumulative reduction of $2.42 trillion from the peak of $8.96 trillion in April 2022.
2. Reserves Fall Below Key Threshold
● Entering the second half of 2025, the continuous decline in the banking system's reserves has become the most closely watched indicator. By the end of September, the reserve balance fell below $3 trillion for the first time, dropping to $2.93 trillion, the lowest level since June 2020.
● By the week ending October 22, this figure remained at $2.93 trillion, marking the eighth consecutive week of decline, the lowest level since January of this year. Federal Reserve Governor Waller had previously estimated that a "sufficient" level was around $2.7 trillion, and he recently hinted that reserves might be approaching this lower limit.
● Bank of America strategists noted: “Current or higher money market interest rates should signal to the Federal Reserve that reserves are no longer 'ample.' From some indicators, the Federal Reserve may also believe that reserves are no longer 'sufficient.'”
3. Market Sounds Liquidity Alarm
A series of market indicators have simultaneously lit up red, signaling that the safety cushion of liquidity in the financial system is rapidly thinning. The balance of overnight reverse repurchase agreements has gradually fallen from a peak of $2.55 trillion at the end of December 2024 to just $219 billion by October 25, 2025.
● Volatility in short-term financing market interest rates has significantly increased. The spread between the effective federal funds rate and the interest on reserves widened in the third quarter of 2025, averaging 7 basis points in September and peaking at 9 basis points in October.
● More alarmingly, the Federal Reserve's standing repurchase facility was used in large amounts continuously in mid-October. On October 15, the single-day operation scale of the SRF reached $6.75 billion; the next day it reached $8.35 billion, the largest scale since the outbreak of the COVID-19 pandemic in a non-quarter-end environment.
● Analysts believe that if the usage of the SRF and similar tools remains high or becomes normalized, it indicates that financial institutions cannot meet funding needs through the market, reflecting a decline in the market's self-adjustment capacity.
4. Decision and Considerations to Stop Balance Sheet Reduction
In the face of increasingly evident market pressures, Federal Reserve policymakers made a key decision at the October monetary policy meeting.
On October 30, the Federal Open Market Committee officially announced that it would end the quantitative tightening program on December 1, 2025, ceasing the active reduction of its securities holdings.
This decision marks a new phase in the management of the Federal Reserve's balance sheet, shifting from a passive contraction model that lasted two years to a neutral reinvestment state.
Federal Reserve Chairman Powell explained the decision logic in a 42-minute press conference: “We have reached the appropriate point to stop the net outflow of funds; continuing to reduce the balance sheet would lead to a shortage of bank reserves, disrupt the effective transmission of monetary policy to the real economy, and increase financial stability risks.”
This decision includes four core changes: First, the termination of the passive reduction mechanism for the balance sheet; second, the reinvestment targets shifting from long-term Treasury securities to short-term Treasury bills; third, the future size of the balance sheet will dynamically match the banking system's reserve needs, nominal GDP growth, and financial stability goals; fourth, it is clarified that this move does not constitute quantitative easing.
5. Mechanism Transformation and Invisible Easing
● With the end of QT, a new mechanism called "Reserve Management Purchases" will debut in January 2026. The Federal Reserve officially defines RMP as a "technical operation" to ensure sufficient liquidity in the financial system, but the market tends to interpret it as a form of "covert easing" or quasi-quantitative easing.
● Behind this transformation is a clear alarm from the money market: the interbank market prefers to pay a higher premium to finance in the market rather than use reserves held at the Federal Reserve, exposing structural blockages in the distribution of liquidity within the financial system.
● A report from the Chicago Mercantile Exchange points out that the deeper logic behind this change is closely related to the "regulatory dominance" hypothesis proposed by Federal Reserve Governor Stephen Milan.
● The stringent regulations in the post-crisis era force banks to hold high-quality liquid assets far exceeding operational needs, and in the accounting of regulatory indicators, cash often has an advantage over Treasury securities, which has significantly raised the baseline demand for reserves in the banking system.
6. Transmission Effects on Various Assets
Marginal changes in the liquidity environment have begun to leave marks on the prices of various assets.
● The bond market reacted quickly to the end of QT. The yield on the 10-year U.S. Treasury bond fell rapidly from 4.28% before the October 30 meeting to 4.08%. The yield on the 30-year Treasury bond dropped from 4.55% to 4.38%, narrowing the spread between long and short ends.
● The real estate market directly benefits from the decline in long-term interest rates. The Fannie Mae Economic and Strategic Research Group predicts that the average 30-year fixed mortgage rate in 2025 may drop to 6.3%, a decrease of 70 basis points from the actual average in 2024.
● The corporate financing environment is also improving. In the third quarter of 2025, the total issuance of U.S. investment-grade corporate bonds reached $450 billion, the highest since the first quarter of 2023. High-yield bond issuance reached $110 billion, with spreads narrowing from 450 basis points at the end of 2024 to 300 basis points in October 2025.
The core driving logic of the cryptocurrency market regarding Bitcoin is also closely related to this. Analysts point out: “When the Federal Reserve prints money and provides liquidity, Bitcoin rises; when the Federal Reserve reduces its balance sheet and withdraws liquidity, Bitcoin falls.”
Federal Reserve Chairman Powell's "we can walk and see" still echoes, but the market has realized that the transition from QT to RMP is not just a technical adjustment.
When the new mechanism starts in January 2026, the Federal Reserve's balance sheet will no longer be a simple "financial extraction machine," but may become a precise system for "drip irrigation" based on the needs of the banking system.
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