5 min read

Money Market Update: Primal Fear - US money market blowups

Published on

August 27, 2025

Written by

Arne Petimezas

Director Research

The Fed’s reverse repo balance will soon drop to zero. That should not cause any problems. Money market spreads - SOFR and fed funds versus IOER - will remain well-anchored;
Based on the mechanics of Quantitative Tightening net of the Fed’s operating losses, reserves to total assets/liabilities of the US banking system will decline to the September 2019 level by the spring of 2026. When relative reserves become that low, money market spreads could become unanchored. Hence, the Fed could end QT around the winter or thereabout as to leave banks with a cushion of additional excess reserves;
After all, a confluence of events can drain reserves from the banking system and temporarily leave them with too little reserves (i.e. September 2019 levels). Think of a quarter turn with sizeable tax payments and/or net Treasury issuance and a sudden jump in reverse repo facility recourse. Note that during the recent half year turn, the banking system lost a massive amount of reserves. Borrowing from the Fed’s repo facility couldn’t even come close to offsetting the loss;
A more daring Fed could push bank reserves below their September 2019 levels. The Fed now has an official ceiling in place for secured rates in place: the standing repo facility. That *should* make structural settlements above IOR impossible. However, I am not so sure about that. I have a loth of confidence in the ECB’s management of its banking system liquidity. About the Fed I am not so sure though;
If I had to make a forecast for spreads, I would expect linear increases, with slightly stronger increases in average SOFR settlements. The Fed will announce the end of QT at the December or January FOMC. And that will be the end of spread increases. I think the Fed will choose money market stability over profitability and the very enticing prospect of a smaller balance sheet;