Fed reserves fall below $3 trillion, lowest level since 2020

Reserves in the U.S. banking system, a factor crucial to the Fed's decision to release the continued reduction of its balance sheet, fell to about $2.89 trillion in the week ending January 1, below the $3 trillion mark and reaching the lowest point since October 2020. This was the largest single-week decline in more than two and a half years, according to data released by the Federal Reserve on Thursday. Bank reserves fell by about $326 billion during the week. To meet regulatory requirements, banks were forced to reduce balance sheet activities such as repurchase agreements at the end of the year. This means that cash will flow to places such as the Fed's overnight reverse repurchase (RRP) facility, draining liquidity from other liabilities on the Fed's books. RRP balances increased by $375 billion between December 20 and December 31, 2024, and then decreased by $234 billion on Thursday. At the same time, the Fed also removed excess cash from the financial system through its quantitative tightening (QT) program, and institutions continued to repay loans from bank term funding programs. (Jinshi)