Minutes from the Federal Reserve’s December 2025 policy meeting showed that officials are keeping a close eye on a risk that rarely makes headlines but can quickly roil markets: whether the financial system could quietly run short of cash even with little change in interest rates.
Minutes of the December 9-10 Federal Open Market Committee meeting released on December 30 showed that policymakers were generally satisfied with the economic backdrop. The minutes of the meeting pointed out that investors mainly expected a 25 percentage point interest rate cut at the meeting and expected further interest rate cuts in 2026, while interest rate expectations showed little change during the meeting.
But the discussion goes well beyond policy rates. The minutes repeatedly highlighted signs that short-term funding markets, where banks and financial firms borrow and lend cash overnight to facilitate daily transactions, were becoming strained.
At the heart of this concern is the level of cash in the banking system, known as reserves. Minutes of the meeting showed reserves had fallen to a level the Fed considered “adequate.” While that sounds reassuring, officials describe this area as one where conditions could become more sensitive: Small swings in demand could push up overnight borrowing costs and lead to tight liquidity.
Some warning signs are flagged. The minutes of the meeting pointed out that overnight repurchase rates have increased and become more volatile, the gap between market interest rates and the Fed’s managed interest rates has continued to widen, and reliance on the Fed’s standing repurchase operations has increased.
Several participants noted that some of these stresses appear to be building faster than during the Fed’s 2017-19 balance sheet runoffs, a comparison that underscores how quickly funding conditions have deteriorated.
Seasonal factors add to concerns. Staff forecasts suggest year-end pressures, changes in late January and especially large inflows in the spring related to tax payments into the Fed’s Treasury account could sharply deplete reserves. The minutes showed that without action, reserves could fall below comfort levels, raising the risk of market disruption overnight.
In response to this risk, participants discussed starting to purchase short-term Treasury bonds to maintain adequate reserves in the long term. The minutes emphasized that the purpose of these purchases was to support interest rate control and smooth market operation, rather than to change the stance of monetary policy. Survey respondents said in minutes that purchases were expected to total about $220 billion in the first year.
The minutes also showed officials were seeking to increase the effectiveness of the Fed’s standing repurchase facility – a support program designed to provide liquidity during times of stress. Participants discussed removing caps on the tool’s overall use and clarifying communications so market participants see it as a normal part of the Fed’s operating framework rather than a last resort.
Markets are now 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. As of Jan. 1, CME Group’s FedWatch tool showed traders saw an 85.1% chance that the Fed would keep interest rates steady, while there was a 14.9% chance of lowering rates by 25 percentage points to a range of 3.25% to 3.50%.