Minutes from the Federal Reserve’s December 2025 policy meeting show that officials are paying close attention to a risk that rarely makes headlines but could quickly disrupt markets: whether the financial system could quietly run out of money even if interest rates barely move.
The minutes of the December 9-10 Federal Open Market Committee meeting, released on December 30, suggest that policymakers generally understand the economic situation. Interest rate expectations remained largely unchanged over the course of the meeting, with investors primarily expecting a quarter-point rate cut at that meeting and another rate cut in 2026, minutes showed.
But the debate extended far beyond policy rates. The minutes repeatedly highlighted signs of tight short-term funding markets, where banks and financial companies lend and borrow cash overnight to facilitate day-to-day transactions.
At the heart of that concern is the level of cash, known as reserves, within the banking system. Reserves have been reduced to what the Fed considers an “adequate” level, the minutes said. While that sounds reassuring, officials described the zone as one where conditions could become more sensitive, where small fluctuations in demand could raise overnight borrowing costs and strain liquidity.
Several warning signs have been erected. The minutes cited the rise and instability of overnight repo rates, the widening gap between market interest rates and the Fed’s managed interest rates, and the Fed’s increasing reliance on standing repo operations.
Several participants noted that some of these pressures appear to be building more rapidly than during the Fed’s 2017-2019 balance sheet outflows, but the comparison highlights how quickly funding conditions can deteriorate.
Seasonal factors also added to the concerns. Staff forecasts showed that year-end pressures, a late-January shift, and a large spring influx, especially related to tax payments flowing into the Fed’s Treasury account, could lead to a sharp outflow of reserves. Without action, reserves could fall below comfortable levels, increasing the risk of disruption to the overnight market, according to the minutes.
To address this risk, participants discussed starting to purchase short-term Treasury securities to maintain sufficient reserves over the long term. The minutes of the meeting emphasize that the purpose of these purchases is to control interest rates and support smooth market functioning, not to change the stance of monetary policy. Survey respondents cited in the minutes expected purchases to total about $220 billion in the first year.
The minutes also show that officials are seeking to increase the effectiveness of the Fed’s standing repo facility, a backstop designed to provide liquidity in times of stress. Participants discussed removing overall caps on the tool and clarifying communications so that market participants view the tool as a normal part of the Fed’s operating framework rather than a signal of last resort.
The market is currently focused on the next policy decision. The federal funds target range is currently 3.50% to 3.75%, and the next FOMC meeting is scheduled for January 27-28, 2026. CME Group’s FedWatch tool showed that as of Jan. 1, traders had an 85.1% chance that the Fed’s holdings rate would be stable and a 14.9% chance that it would be lowered by 0.5 percentage point to a range of 3.25% to 3.50%.
