The US banking system’s reserves, a key factor in the Federal Reserve’s decision to keep shrinking its balance sheet, tumbled below US$3 trillion (RM13.4 trillion) to the lowest since October 2020.
Bank reserves fell by about US$326 billion in the week through Jan 1 to US$2.89 trillion, according to Fed data released on Thursday. That’s the largest weekly slide in over two-and-a-half years.
The decline comes as year-end dynamics force banks to pare balance-sheet intensive activities like repurchase agreement transactions in order to shore up their books for regulatory purposes. That means cash is directed to places like the central bank’s overnight reverse repo facility, draining liquidity from other liabilities on the Fed’s ledger.
-->
Balances at RRP swelled by US$375 billion between Dec 20 and Dec 31 before falling by US$234 billion on Thursday.
As the same time, the Fed has also been removing excess cash from the financial system through its quantitative tightening programme, just as institutions continue to repay loans from the Bank Term Funding Programme.
With US policymakers continuing QT, Wall Street strategists have been paying close attention to the lowest comfortable level of reserves — which some have estimated between US$3 trillion and US$3.25 trillion, including a buffer. Policymakers said at last month’s gathering it was continuing to shrink its balance sheet.
It also adjusted the offering rate on the RRP facility so that it’s in line with the bottom of the target range for the fed funds rate.
That put downward pressure on short-term interest rates and some think that it could be enough to stave off reserve scarcity for a little bit longer.
Source: Bloomberg
