Since December 2025, the Federal Reserve (U.S. Central Bank) has acquired about 200 billion dollars in U.S. Treasury securities (T-bills). This action caused bank reserves to increase by 180 billion dollars, surpassing the 3 trillion dollar mark, a level considered relevant for the stability of the money market.
The total volume of securities held by the Fed, including T-bills, reached 6.3 trillion dollars, with a recent increase of 155 billion. On the other hand, the effective federal funds rate remained at 3.64%, slightly below the rate on reserves, which is 3.65%. Historically, this effective rate tends to be about 8 basis points above the federal funds rate floor, but in September and October 2025, this difference widened to 14 basis points.
The increase in the effective funds rate was associated with the decrease of bank reserves to below 3 trillion dollars, which caused greater pressure in the repurchase (repo) market. At the same time, the SOFR (Secured Overnight Financing Rate), which serves for collateralized operations in the repo market, tends to stay below the effective funds rate, reflecting the cost of secured credit.
Additionally, the Federal Home Loan Banks play a relevant role in the federal funds market, as they participate in operations that affect the effective rate, especially because they cannot postpone reserves, although they operate at the federal funds rate. This dynamic, in turn, contributes to the formation of overnight interest rates in the banking system.
Therefore, the Federal Reserve’s policy of continuous purchase of Treasury securities aimed to alleviate the tightening detected in the repo market in 2025. At the same time, the central bank maintains reverse repo operations to withdraw part of the liquidity offered, balancing the financial system.
The conclusion of the process still depends on analyzing the effects of these measures on money market liquidity, which is monitored by the authority while maintaining the securities purchase and sale instruments aligned with the monetary policy target. The next step will be to observe whether this stabilization will persist with rising reserve levels and rates close between the federal funds and the SOFR.
Economic Context and Market Expectations
The escalation of the war in Iran has raised short-term inflation expectations in the United States, positioning the two-year break-even rate around 3.1%. This movement pressures the economic scenario since inflation could approach 4%, complicating the implementation of interest rate cuts by the Federal Reserve (Fed).
Currently, the federal funds rate is projected to remain stable in the coming months. However, if the conflict in Iran is resolved quickly, there is a possibility of interest rate reductions. The movement of ships in the Strait of Hormuz is seen as a determining factor for assessing this situation and defining the Fed’s next steps.
The U.S. money market presents a significant dimension, with the volume of funds in this segment representing approximately 25% of the country’s Gross Domestic Product (GDP). This value is close to the historical record of 27%, registered in 2009, showing the importance of these funds for the liquidity of the financial system.
Despite stability or slight retraction in certificates of deposit and common deposits, prime money market funds continue to expand. This growth reflects the increase in exposures to commercial paper and deposit notes, indicating changes in investors’ preferences in the short-term market.
The increase in bank deposits is mainly concentrated in large institutions, while smaller ones maintain their volume relatively stable. Meanwhile, overnight commercial paper rates exceed the Fed’s reverse repurchase rate, revealing tightness in the repo operations market and the relative values of U.S. Treasury securities (T-bills).
To adjust this scenario, the Federal Reserve announced that, starting April 1, 2026, it will review the leverage ratio requirements for banks. The change will allow these institutions to expand their capacity for buying securities and repo operations, especially for the larger financial institutions.
Overall, the market is moving toward a possible environment of scarcer reserves, in contrast to the current excess liquidity. This transition will have a direct impact on reserve management and influence the definition of the federal funds rate.
