Reserves at Fed sink below $3 trillion to the lowest since 2020

US banking system reserves dropped below $3 trillion for the first time since October 2020, reaching $2.89 trillion as of January 1, 2025, marking a $326 billion decline.

This drop is attributed to year-end dynamics as banks reduce balance-sheet activities, moving cash to the Federal Reserve's overnight reverse repo (RRP) facility.

The Fed's quantitative tightening (QT) program has also removed excess liquidity from the financial system. While the Fed aims to maintain a comfortable reserve level between $3 trillion and $3.25 trillion, concerns persist about reserve scarcity, recalling the 2019 market disruption.

The recent reinstatement of the debt ceiling complicates this, with many analysts predicting that QT could end in the first or second quarter of 2025.