Fed’s Balance Sheet Runoff in Focus as Bank Reserves Are Ebbing

Prolonged funding pressures in US money markets, just as bank reserves held at the Federal Reserve are dwindling, suggest the central bank may be getting closer to ending the unwinding of its massive portfolio of securities.

Overnight funding markets, where banks and asset managers borrow and lend to each other on a day-to-day basis, have been volatile since the beginning of September. Ultra-short-term interest rates, which have been steadily rising as the Treasury is rebuilding its cash pile, remain stubbornly elevated even after a benign quarter end.

As a result, the gap between the Secured Overnight Financing Rate and the ...