2.93 trillion USD—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 USD from the previous week, hitting the lowest point since early December.
This ever-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 banking system's reserve balance has fallen from about 3.2 trillion USD at the end of June 2025, cumulatively decreasing by about 270 billion USD in half a year, and has continued to decline since first dropping below the psychological threshold of 3 trillion USD at the end of September.
1. Three Years of Quantitative Tightening
The quantitative tightening policy began on June 1, 2022, when the US economy was facing the most severe inflationary pressures in decades.
● Each month, the Federal Reserve allowed up to 60 billion USD in Treasury securities and 35 billion USD in agency mortgage-backed securities to mature without reinvestment, withdrawing liquidity from the financial system at a maximum monthly pace of 95 billion USD.
● This liquidity contraction process underwent several adjustments. In June 2024, the Fed lowered the monthly cap for maturing Treasuries from 60 billion USD to 25 billion USD. By April 2025, the cap for Treasuries was further reduced to 5 billion USD, and the MBS cap was simultaneously reduced to 35 billion USD, compressing the monthly balance sheet reduction to below 38.5 billion USD.
● As of the week ending October 22, 2025, the Federal Reserve's total assets stood at 6.54 trillion USD, a cumulative reduction of 2.42 trillion USD from the April 2022 peak of 8.96 trillion USD.
2. Reserve Balance Falls Below Key Threshold
● Entering the second half of 2025, the continuous decline in bank system reserves has become the most closely watched indicator. At the end of September, the reserve balance fell below 3 trillion USD for the first time, dropping to 2.93 trillion USD, the lowest level since June 2020.
● By the week ending October 22, this figure remained at 2.93 trillion USD, marking the eighth consecutive week of decline and the lowest level since January this year. Federal Reserve Governor Waller once estimated the "ample" level to be about 2.7 trillion USD, and he recently hinted that reserves may be approaching this lower limit.
● Bank of America strategists pointed out: "Current or higher money market rates should signal to the Fed that reserves are no longer 'ample.' From some indicators, the Fed may also consider reserves no longer 'sufficient.'"
3. Market Sounds the Liquidity Alarm
A series of market indicators have simultaneously flashed red, signaling that the liquidity cushion in the financial system is rapidly thinning. The overnight reverse repo tool balance has gradually fallen from its peak of 2.55 trillion USD at the end of December 2024 to only 219 billion USD as of October 25, 2025.
● Volatility in short-term financing market rates has risen significantly. The spread between the effective federal funds rate and the interest on reserve balances widened in Q3 2025, averaging 7 basis points in September and rising to 9 basis points at one point in October.
● More alarming is the fact that the Fed's Standing Repo Facility was used in large scale for several consecutive days in mid-October. On October 15, the SRF's single-day operation reached 6.75 billion USD; the next day, it hit 8.35 billion USD, the largest scale outside of quarter-end since the outbreak of COVID-19.
● Analysts believe that if the use of SRF and similar tools remains high or even becomes normalized, it indicates that financial institutions are unable to meet funding needs through the market, and the market's self-adjustment capability is declining.
4. The Decision and Considerations to Stop Balance Sheet Reduction
Faced with increasingly evident market pressures, Federal Reserve policymakers made a key decision at the October policy meeting.
On October 30, the Federal Open Market Committee officially announced that the quantitative tightening program would end as of December 1, 2025, ceasing active reduction of securities holdings.
This decision marks a new phase in the Fed's balance sheet management, shifting from two years of passive contraction to a neutral reinvestment stance.
Fed Chair Powell spent 42 minutes at the post-meeting press conference explaining the decision logic: "We have reached an appropriate point to stop net outflows of funds; continuing to shrink 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, ending the passive reduction mechanism of the balance sheet; second, shifting reinvestment targets from long-term Treasuries to short-term Treasury bills; third, future balance sheet size will dynamically match the banking system's reserve needs, nominal GDP growth, and financial stability goals; fourth, it is made clear that this move does not constitute quantitative easing.
5. Mechanism Transformation and Stealth Easing
● With the end of QT, a new mechanism called "Reserve Management Purchases" will be introduced in January 2026. The Fed 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 "stealth easing" or "quasi-quantitative easing."
● Behind this transformation is a clear warning from the money market: the interbank market would rather pay a higher premium to finance in the market than use reserves held at the Fed, exposing a structural blockage in the distribution of liquidity within the financial system.
● A CME report points out that the deeper logic behind this change is closely related to the "regulation-driven" hypothesis proposed by Fed Governor Steven Miran.
● Strict post-crisis regulation has forced banks to hold high-quality liquid assets far in excess of operational needs, and in regulatory calculations, cash often has more advantages than Treasuries, which has invisibly raised the baseline demand for reserves in the banking system.
6. Transmission Effects on Various Asset Classes
Marginal changes in the liquidity environment have already begun to leave marks on the prices of various asset classes.
● The bond market responded quickly to the end of QT. The 10-year US Treasury yield quickly fell from 4.28% before the October 30 meeting to 4.08%. The 30-year Treasury yield dropped from 4.55% to 4.38%, narrowing the spread between long and short maturities.
● 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 for 2025 may fall to 6.3%, a decrease of 70 basis points from the actual average in 2024.
● The corporate financing environment has also improved. In Q3 2025, the total issuance of US investment-grade corporate bonds reached 450 billion USD, the highest since Q1 2023. High-yield bond issuance reached 110 billion USD, and the spread narrowed from 450 basis points at the end of 2024 to 300 basis points in October 2025.
The core driving logic for bitcoin in the crypto market is also closely related to this. Analysis points out: "When the Fed prints money and injects liquidity, bitcoin rises; when the Fed shrinks its balance sheet and withdraws liquidity, bitcoin falls."
Fed Chair Powell's "wait and see" approach still echoes, but the market has realized that the shift from QT to RMP is more than just a technical adjustment.
When the new mechanism launches in January 2026, the Fed's balance sheet will no longer be a simple "financial pump," but may become a sophisticated system for "drip irrigation" based on the needs of the banking system.
