The scale of US bank reserves continues to decline, falling below 3 trillion. The Federal Reserve's interest rate meeting next week may face a crucial decision.

It's noted that the level of reserves in the US banking system has been declining for the second consecutive week, further dropping below $3 trillion. Reserves are a key factor for the Federal Reserve to decide on whether to continue shrinking its balance sheet, and this comes at a time when the Fed is about to determine its balance sheet path. According to Fed data released on October 24, for the week ending October 22, bank reserves decreased by approximately $59 billion, falling to $2.93 trillion, the lowest level since the week of January 1. This decline comes as the Treasury has been increasing its borrowing efforts since the debt ceiling was raised in July to rebuild its cash balance. This has drained liquidity from other liability items on the Fed's balance sheet, such as overnight reverse repurchase agreement tools and bank reserves. Now, with the so-called reverse repo tools running low on funds, commercial bank reserves held at the Fed have been declining. As the Fed continues to shrink its balance sheet (a process known as quantitative tightening), fund movements are impacting the daily operations of the financial system. Due to the possibility that quantitative tightening could exacerbate liquidity constraints and lead to market volatility, the Fed slowed down its balance sheet reduction earlier this year, reducing the amount of bonds it lets mature each month. Market expectations are for Fed officials to discuss the future of the balance sheet at their meeting next week in Washington. While a policy rate cut to 3.75%4% is seen as highly likely, Wall Street is less certain about when policymakers will stop quantitative tightening another tool the Fed uses to influence interest rates. Strategists at JPMorgan and Bank of America predict that the Fed will stop reducing its balance sheet of about $6.6 trillion this month, ending the process of draining liquidity from the financial markets. TD Securities and Liten ICAP also share this view. Fed Chair Jerome Powell indicated last week that the balance sheet reduction would stop when bank reserves are slightly above the level policymakers see as being in line with a "comfortable" level the minimum level needed to prevent market turmoil. He gave the strongest signal yet that the Fed may be "within a couple of months" of reaching this point. Money market rates continue to rise, even though there was more cash inflow into the front end rates this week. The reason for this is that government-supported enterprises deposit their funds into the repo market before paying monthly principal and interest to mortgage-backed securities holders around the 25th of each month. For strategists, the high and volatile rates in the repo market indicate that reserves are no longer abundant and the financial system is approaching a scarcity state.