The minutes from the Federal Reserve’s December 2025 policy meeting reveal officials closely monitoring a risk that seldom makes headlines but can swiftly disrupt markets: the potential for the financial system to quietly experience a cash shortage, even with stable interest rates.
Released on Dec. 30, the minutes from the Dec. 9–10 Federal Open Market Committee meeting indicate that policymakers were generally at ease with the economic landscape. Investors, according to the minutes, anticipated a quarter-point rate reduction at that meeting and expected further cuts in 2026, with rate expectations shifting little during the intermeeting period.
However, the discussion encompassed more than just the policy rate. The minutes repeatedly underscore indications that short-term funding markets — where banks and financial firms lend and borrow cash overnight to facilitate daily operations — are tightening.
Central to these concerns is the level of cash, or reserves, within the banking system. The minutes note reserves have fallen to levels the Fed deems “ample.” While this may sound reassuring, officials described this range as one that can become increasingly sensitive: minor fluctuations in demand can elevate overnight borrowing costs and strain liquidity.
A number of warning signs were highlighted. The minutes reference high and volatile overnight repo rates, widening gaps between market rates and the Fed’s administered rates, and greater reliance on the Fed’s standing repo operations.
Several participants remarked that some of these pressures appeared to be intensifying more swiftly than during the Fed’s balance-sheet runoff from 2017 to 2019, illustrating how quickly funding conditions can change for the worse.
Seasonal factors have compounded the concerns. Staff projections suggested that end-of-year pressures, shifts in late January, and particularly a significant influx in spring related to tax payments going into the Treasury’s account at the Fed could sharply deplete reserves. Unless action is taken, the minutes warn, reserves may dip below comfortable levels, increasing the risk of disruptions in overnight markets.
To mitigate this risk, participants discussed initiating purchases of short-term Treasury securities to ensure ample reserves are maintained over time. The minutes stress that these purchases aim to support interest-rate control and improve market function, not alter the stance of monetary policy. Survey respondents cited in the minutes expected these purchases to reach approximately $220 billion over the course of the first year.
The minutes also indicate that officials are looking to boost the effectiveness of the Fed’s standing repo facility — a safeguard meant to provide liquidity during stress periods. Participants deliberated on eliminating the overall usage cap of this tool and clarifying communications so that market participants perceive it as a routine aspect of the Fed’s operations rather than a last-resort measure.
Markets are now gearing up for the next policy decision. The federal funds target range is currently set at 3.50% to 3.75%, with the next FOMC meeting scheduled for Jan. 27–28, 2026. As of Jan. 1, CME Group’s FedWatch tool indicated that traders assigned an 85.1% probability to the Fed maintaining current rates, compared to a 14.9% likelihood of a quarter-point cut to a 3.25%–3.50% range.
