U.S. Money Market Faces Year-End Funding Pressure as Wall Street Anticipates Fed Action

Wall Street banks are bracing for heightened year-end pressure in the money markets, with analysts predicting that funding strains may prompt the Federal Reserve to consider measures to rebuild liquidity buffers in the $12.6 trillion market.

This week's Fed policy meeting marks the central bank's first since it halted balance sheet reduction in December. The Fed has yet to clarify its post-tapering strategy, including the composition of its Treasury portfolio. As borrowing costs remain elevated, market participants increasingly expect policymakers to take more concrete steps to ease liquidity pressures—such as restarting direct securities purchases to replenish financial system reserves.

They anticipate Fed Chair Jerome Powell will provide clues about the next steps at the conclusion of Wednesday's policy meeting.

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, noted: "Powell may signal the Fed is paying closer attention to the front end of the yield curve. He could also hint the central bank is nearing the point where it must start increasing reserves. That’s the real issue—they’re gauging how much flexibility remains in the system based on year-end market performance."

A key question is whether financial system reserves are sufficient to prevent market dislocations during year-end periods, when banks typically reduce repo market activity to shore up balance sheets for regulatory and tax settlement requirements.

One sign of mounting pressure: The overnight general collateral repo rate for Dec. 31–Jan. 2 stands at about 4.25%. Assuming the Fed cuts rates by 25 basis points as expected Wednesday, this would exceed the interest on reserve balances (IORB) rate by 60 basis points.

Since summer, increased Treasury bill issuance has drained cash from short-term markets, reducing bank system liquidity and pushing rates higher.

New York Fed President John Williams said last month that reserves are approaching "ample" levels, which would trigger Fed securities purchases. Latest data shows reserves currently at $2.88 trillion.

Wall Street strategists disagree on when the Fed must begin buying assets. Bank of America and JPMorgan Chase see potential action as early as January 2026, while TD Securities expects only an announcement that month. Deutsche Bank and Barclays forecast purchases starting in Q1, with Bank of New York Mellon anticipating moves in H1—possibly Q1.

Jason Granet, CIO at Bank of New York Mellon, stated: "The critical question is whether the system has enough reserves to meet all reserve requirements. What exactly constitutes 'enough'? This involves both the total amount and distribution of reserves."

Granet highlighted that usage of the Fed’s Standing Repo Facility (SRF) hit a record $50.4 billion in late October, signaling challenges for lenders and borrowers in finding counterparties.

While SRF allows eligible institutions to exchange Treasuries and agency debt for cash, repo rates remain above SRF offering levels—even as SRF usage reached its highest since regular operations began over four years ago.

For Bank of America and JPMorgan Chase strategists, this suggests the Fed may need to provide temporary liquidity to ease year-end funding strains.

Teresa Ho, head of U.S. short-term rates strategy at JPMorgan Chase, recently suggested the central bank could conduct temporary year-end open market operations. Bank of America’s U.S. rates strategist Mark Cabana expects the Fed to announce term repo operations this week.