The minutes from the Federal Reserve’s December 2025 policy meeting show officials 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 as interest rates barely move.
Published on December 30, the minutes of the meeting of the Federal Open Market Committee on 9-10 December, that the politicians were largely familiar with the economic background. Investors, the minutes note, broadly expected a quarter-point rate cut at that meeting and expected further reductions in 2026, and rate expectations changed little during the intermeeting period.
But the discussion extended far beyond the key interest rate. The note repeatedly highlighted signs that short-term funding markets – where banks and financial firms borrow and lend cash overnight to facilitate day-to-day transactions – were tightening.
At the center of this concern is the level of cash, known as reserves, in the banking system. The minutes say reserves had fallen to what the Fed considers “correct” levels. While that sounds reassuring, officials described this zone as one where conditions can become more sensitive: Small fluctuations in demand can push overnight borrowing costs higher and strain liquidity.
Several warning signs were marked. The minutes mention elevated and volatile repo rates from day to day, increasing differences between market rates and the Fed’s administered rates, and increased reliance on the Fed’s standing repo operations.
Several participants noted that some of these pressures appeared to be building faster than during the Fed’s 2017-19 balance sheet rundown, a comparison that highlights how quickly funding conditions can deteriorate.
Seasonal factors added to the concern. Staff projections indicated that year-end pressures, shifts in late January and, in particular, a large spring influx tied to tax payments flowing into the Treasury’s account at the Fed could drain reserves sharply. Without action, it appears from the minutes, reserves could fall below comfortable levels and thus increase the risk of disruptions in day-to-day markets.
To address this risk, participants discussed initiating purchases of short-term government securities to maintain ample reserves over time. The minutes emphasize that these purchases are intended to support interest rate control and smooth market functioning, not to change the stance of monetary policy. Survey respondents cited in the minutes expected purchases to total about $220 billion during the first year.
The memo also shows officials seeking to increase the effectiveness of the Fed’s standing repo facility — a backstop designed to provide liquidity during periods of stress. Participants discussed removing the tool’s overall spending cap and clarifying communications so market participants see it as a normal part of the Fed’s operating framework rather than a last-resort signal.
The markets are now focused on the next political decision. The federal funds target range is currently at 3.50% to 3.75% and the next FOMC meeting is scheduled for 27-28. January 2026. As of January 1, CME Group’s FedWatch tool showed traders assigned an 85.1% probability that the Fed will hold interest rates, compared to a 9% to 14%-point chance. 3.25%-3.50% range.
