The Federal Reserve's bank reserves have fallen to the warning line of 12.2%. Good news is coming; the Federal Reserve may end the balance sheet reduction process early, and the hard times are finally coming to an end. Global liquidity will be abundant again, and the strong dollar may reach a turning point, providing a strong boost to digital currency assets.
A very important piece of data was recently released: the bank reserves on the Federal Reserve's books have officially fallen below $3 trillion. As of the week of January 1 this year, U.S. bank reserves have reached $2.89 trillion, dropping to the lowest level since 2020. The ratio of these reserves to the total assets of U.S. commercial banks has now fallen to the warning line of 12.2%.
If it officially falls below 12%, the Federal Reserve will definitely take action. Why has the bank reserves suddenly decreased so much? This is because, at the end of the year, the Federal Reserve audits and supervises the asset conditions of various banks. Banks will rush to clear many complex financial instruments, resulting in banks selling assets in the financial market to exchange for currency, which is then returned to the Federal Reserve's reverse repo account. This is akin to banks also starting to reduce their balance sheets. The Federal Reserve is currently reducing its balance sheet by about $50 billion each month. At this time, as banks also reduce their balance sheets alongside the Federal Reserve, market liquidity will certainly decrease significantly.
The most direct impact was on the U.S. stock market during the week of December 31, during Christmas. A total of $35.3 billion flowed out of U.S. stock funds in one week, marking the largest single-week outflow since 2022. With bank reserves falling to the warning line, isn't the Federal Reserve worried? In 2017, there was a liquidity crisis in the U.S., and the Federal Reserve chose to continue reducing its balance sheet, which led to a liquidity crisis in the interbank market in early 2019.
Last November, the JPMorgan team had already raised the alarm. If bank reserves see a significant decline, the Federal Reserve will likely stop the balance sheet reduction process directly in the first quarter of 2025. Now that the reserves have dropped to the warning line, it remains to be seen whether the Federal Reserve will stop the balance sheet reduction. If they do, global liquidity will flood the market, effectively lowering interest rates for the market. The strong dollar may turn into a weak dollar, which would be a strong boost for non-US currencies and capital markets such as U.S. stocks and the cryptocurrency market. So when exactly will the Federal Reserve stop the balance sheet reduction? We await the market's developments.