Bank Reserves

What Are Bank Reserves?

Bank reserves are deposits held by commercial banks at the Federal Reserve. They serve two purposes: meeting regulatory requirements and facilitating interbank payments. Reserves are the most liquid asset a bank can hold — they are literally cash at the central bank.

Ample vs Scarce Reserves

The Fed operates in an "ample reserves" framework, meaning it keeps enough reserves in the system that the fed funds rate stays within its target range without daily intervention. The critical question during QT is: how far can reserves fall before they become "scarce" and short-term funding markets seize up?

The September 2019 Lesson

In September 2019, reserves fell to roughly $1.5 trillion and the repo market experienced a sudden spike in overnight borrowing rates — a signal that reserves had become scarce. The Fed had to intervene with emergency repo operations and eventually restart balance sheet expansion. This episode set a de facto floor for how low reserves can safely go.

Why Reserves Matter Now

As QT continues, reserves are the pressure gauge. When the RRP facility drains, QT begins pulling directly from bank reserves. When reserves approach the "lowest comfortable level" (estimated at $3-3.5 trillion), the Fed will likely slow or stop QT. This makes reserve levels one of the most important variables for predicting the end of the current tightening cycle.