Minutes from the Federal Reserve’s December 2025 policy meeting show officials are paying close attention to a risk that rarely makes headlines but can quickly shake up markets: Whether the financial system could quietly run out of liquidity even if interest rates barely move.
Published on December 30, the minutes of the Federal Open Market Committee meeting on December 9 and 10 suggest that policymakers were generally comfortable with the economic environment. Investors, the minutes note, largely expected a quarter-point rate cut at that meeting and anticipated additional cuts in 2026, and rate expectations changed little in the period between meetings.
But the debate has extended well beyond the key rate. The minutes repeatedly point to signs that short-term funding markets – where banks and financial firms borrow and lend cash overnight to facilitate everyday transactions – are tightening.
Central to this concern is the level of liquidity, called reserves, in the banking system. The minutes indicate that reserves have fallen to levels the Fed considers “sufficient.” While that sounds reassuring, officials described this area as one where conditions can become more sensitive: small fluctuations in demand can drive up overnight borrowing costs and strain liquidity.
Several warning signs have been posted. The minutes document high and volatile overnight repo rates, growing spreads between market rates and the Fed’s administered rates, and increased reliance on the Fed’s permanent repo operations.
Several participants noted that some of these pressures appeared to be building faster than during the Fed’s balance sheet selloff from 2017 to 2019, a comparison that highlights how quickly financing conditions can deteriorate.
Seasonal factors added to the concern. Treasury staff projections indicated that end-of-year pressures, late-January changes and especially a large spring influx related to tax payments flowing into the Treasury’s account at the Fed could significantly drain reserves. Without action, the minutes suggest, reserves could fall below comfortable levels, increasing the risk of disruption to day-to-day markets.
To address this risk, participants discussed purchasing short-term Treasury securities to maintain sufficient reserves over time. The minutes emphasize that these purchases aim to support the control of interest rates and the smooth functioning of the market, and not to change the direction of monetary policy. Survey respondents indicated in the minutes that they expected purchases totaling about $220 billion in the first year.
The minutes also show officials are seeking to improve the effectiveness of the Fed’s Permanent Repo Facility — a safety net designed to provide liquidity in times of stress. Participants discussed removing the tool’s overall usage cap 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.
Markets are now focused on the next political decision. The federal funds target range is currently between 3.50% and 3.75% and the next FOMC meeting is scheduled for January 27-28, 2026. As of January 1, CME Group’s FedWatch tool showed that traders assigned an 85.1% probability that the Fed would keep rates steady, compared to a 14.9% probability of a quarter-point cut in a range of 3.25% to 3.50%.
