Minutes from the Federal Reserve’s December 2025 policy meeting show officials are paying close attention to a risk that rarely makes headlines but can quickly rattle markets: whether the financial system could quietly run out of cash even if interest rates barely budge.
Released on December 30, the minutes of the December 9-10 Federal Open Market Committee meeting suggest that policymakers were generally comfortable with the economic backdrop. Investors, the minutes note, largely expected a quarter-point rate cut at that meeting and anticipated additional reductions in 2026, and rate expectations changed little during the period between meetings.
But the discussion extended far beyond the policy rate. The minutes repeatedly highlighted signs that short-term financing markets – where banks and financial companies borrow and lend cash overnight to facilitate daily transactions – were becoming tighter.
At the center of that concern is the level of cash, known as reserves, in the banking system. The minutes say reserves had fallen to what the Federal Reserve considers “ample” levels. While this sounds reassuring, officials described this zone as one where conditions can become more sensitive: Small swings in demand can raise overnight borrowing costs and strain liquidity.
Several warning signs were pointed out. The minutes cite high and volatile overnight repo rates, growing gaps between market rates and Fed-administered rates, and increased reliance on the Fed’s standing repo operations.
Several participants noted that some of these pressures appeared to be building more quickly than during the Federal Reserve’s 2017-2019 balance sheet runoff, a comparison that highlights how quickly funding conditions can deteriorate.
Seasonal factors added to the concern. Staff projections indicated that year-end pressures, late-January swings and, especially, a large spring influx tied to tax payments flowing into the Treasury account at the Federal Reserve could dramatically deplete reserves. If no action is taken, the minutes suggest, reserves could fall below comfortable levels, thus increasing the risk of disruptions in overnight markets.
To address that risk, participants discussed initiating purchases of short-term Treasury securities to maintain ample reserves over time. The minutes emphasize that these purchases are intended to support the control of interest rates and the proper functioning of the market, not to change the stance of monetary policy. Respondents cited in the minutes that they expected purchases to total about $220 billion in the first year.
The minutes also show officials seeking to improve the effectiveness of the Federal Reserve’s permanent repurchase facility, a backstop designed to provide liquidity during periods of stress. Participants discussed removing the tool’s general use limit and clarifying communications so that market participants see it as a normal part of the Federal Reserve’s operating framework rather than a signal of last resort.
Markets are now focused on the next political decision. The fed funds target range is currently between 3.50% and 3.75%, and the next FOMC meeting is scheduled for Jan. 27-28, 2026. As of Jan. 1, CME Group’s FedWatch tool showed traders assigning an 85.1% chance of the Fed keeping rates steady, versus a 14.9% chance of a quarter-point cut. at a range of 3.25% to 3.50%.
