The Federal Reserve's reserve deposits have fallen to the warning line of 12.2%. Good news is coming; the Federal Reserve may end the balance sheet reduction process early. The hard days are finally coming to an end, global liquidity will once again be abundant, and a strong dollar may reach a turning point, providing a boost to digital currency assets.
A very important piece of data was just released: the bank reserve deposits on the Federal Reserve's balance sheet have officially fallen below $3 trillion. As of the week ending January 1st of this year, US bank reserve deposits stood at $2.89 trillion, the lowest level since 2020. The ratio of these reserve deposits to the total assets of US commercial banks has now dropped to the warning line of 12.2%.
If it officially drops below 12%, the Federal Reserve will definitely have to take action. Why has bank reserve suddenly decreased so much? This is because, at the end of the year, the Federal Reserve needs to audit and regulate the asset status of various banks. Banks will rush to clean out many complex financial instruments, which leads to banks selling assets in the financial market, exchanging them for currency, and returning it to the Federal Reserve's reverse repo account. This means that banks are also starting to reduce their balance sheets. The Federal Reserve is currently reducing its balance sheet by about $50 billion each month. At this point, as banks reduce their balance sheets alongside the Federal Reserve, liquidity in the market will naturally decrease significantly.
The most direct impact was felt during the week of December 31st over the Christmas period on US stocks. A total of $35.3 billion flowed out of US stock funds in one week, the largest single-week outflow since 2022. With bank reserve deposits falling to the warning line, isn't the Federal Reserve worried? Back in 2017, the US faced a liquidity crisis, and the Federal Reserve chose to continue reducing its balance sheet, which resulted in an interbank liquidity crisis in early 2019.
Last November, the JPMorgan team had already sounded the alarm. If bank reserve deposits were to drop significantly, the Federal Reserve would have to directly stop the balance sheet reduction process in the first quarter of 2025. Now, reserve deposits have fallen to the warning line. So the next question is whether the Federal Reserve will stop the balance sheet reduction. Once that happens, global liquidity will flood in, effectively lowering interest rates for the market, and a strong dollar may turn into a weak dollar. This will be a strong boost for global non-US currencies as well as for US stocks, cryptocurrency markets, and other capital markets. So when exactly will the Federal Reserve stop the balance sheet reduction? We await the market's development.