US bank reserves fall below $3 trillion, signaling the Fed may end balance sheet reduction sooner than expected

US bank reserves have fallen for eight consecutive weeks, reaching $2.98 trillion, the lowest level since January, as the Fed continues its "QT" program, putting pressure on liquidity in financial markets. Analysts indicate the Fed is nearing the point where it must end its balance sheet reduction.

On October 3, 2568, at 3:03.49 AM, Bloomberg News reported that U.S. banking reserves, a key factor in the Federal Reserve's (Fed) decisions regarding balance sheet reduction, continued to decline for the eighth consecutive week, falling below $8 trillion for the first time.

Data released Thursday showed that bank reserves fell by about $2.01 billion to $2.98 trillion in the week ending October 1, the lowest level since January.

This decline occurred as the U.S. Treasury accelerated the issuance of debt securities to restore cash flow following the debt ceiling increase in July, which drew liquidity from the Fed's balance sheet, both from reverse repo instruments (RRP) and bank reserves. However, as the use of RRP was nearly exhausted, the reserves that commercial banks deposited with the Fed continued to decline, with foreign banks reducing their cash assets even faster than U.S. banks themselves.

These changes in cash affect the day-to-day operations of the financial system. As the Fed continues to reduce its balance sheet, known as Quantitative Tightening (QT) , a process that can exacerbate liquidity constraints and create volatility in financial markets, the Fed has already slowed down QT earlier this year by reducing the number of bonds maturing and removed from the balance sheet each month.

Jerome Powell, Chairman of the Federal Reserve, stated last month that central bank reserves remain sufficient ("ample") and that he expected the balance sheet reduction to end once reserves reached that level. However, signs in the financial system are beginning to suggest that the Fed may be nearing that level, which could pressure the Fed to end the balance sheet reduction sooner than the market anticipates.

While Michelle Bowman, the Fed's vice chair for regulatory oversight, said last week that the Fed should aim to reduce its balance sheet as much as possible and keep reserve levels closer to scarce than ample, Fed board member Christopher Waller estimated in July that the optimal minimum reserve level might be around $2.7 trillion.

Reference: www.bloomberg.com

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