Minutes from the Federal Reserve’s December 2025 policy meeting show officials are paying close attention to a risk that rarely makes headlines but could quickly trigger market turmoil: whether the financial system could quietly run out of cash even if interest rates barely rise.
Minutes of the December 9–10 Federal Open Market Committee meeting, released on December 30, showed that policymakers were broadly comfortable with the economic backdrop. The minutes reported that investors broadly expected a quarterly rate cut at that meeting and expected additional cuts in 2026, and there was little change in rate expectations over the duration of the meeting.
But the discussion extended far beyond the policy rate. The minutes are repeatedly indicating that short-term funding markets – where banks and financial companies borrow and lend cash overnight to facilitate daily transactions – are becoming tighter.
At the heart of that concern is the level of cash in the banking system, known as reserves. The minutes said reserves had fallen to what the Fed considers “substantial” levels. While this sounds reassuring, officials have described the sector as one where conditions may be more sensitive: small fluctuations in demand could increase overnight borrowing costs and put pressure on liquidity.
Several warning signs were identified. The minutes cite high and volatile overnight repo rates, the growing gap between market rates and Fed-administered rates, and increasing reliance on the Fed’s standing repo operations.
Several participants noted that some of these pressures are growing more rapidly than the Fed’s 2017-19 balance-sheet runoff, a comparison that highlights how quickly the funding situation can deteriorate.
Seasonal factors have increased the concern. Staff estimates indicate that year-end pressures, the late January turnaround, and particularly large springtime inflows associated with tax payments coming into the Treasury’s account at the Fed could lead to a sharp decline in reserves. Without action, the minutes show, reserves could fall below comfortable levels, increasing the risk of disruption in markets overnight.
To address that risk, participants discussed beginning purchases of short-term Treasury securities to maintain adequate reserves over time. The minutes emphasize that the purpose of these purchases is to support interest rate control and smooth market functioning, and not to change the monetary policy stance. Survey respondents reported in the minutes that purchases are expected to total $220 billion in the first year.
The minutes also showed officials are 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 overall use limits on the tool and clarifying communications so that market participants view it as a normal part of the Fed’s operating framework rather than a signal of last resort.
The market’s focus is now 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. As of January 1, CME Group’s FedWatch tool gave traders an 85.1% chance of the Fed holding rates steady, while limiting the chance of a quarter-point cut to a 14.9% range of 3.25%-3.50%.