December 2025 FOMC Minutes Reveal Fed's Concerns Over Short-Term Funding Market Stability
The December 2025 minutes from the Federal Open Market Committee (FOMC) indicate the Federal Reserve's concern about the potential for short-term funding markets to seize up even if interest rates remain steady. The Fed's focus is on ensuring sufficient cash availability within the financial system to prevent disruption.
Signs of short-term funding stress highlighted in the minutes included elevated and volatile overnight repurchase agreement (repo) rates, increased disparities between market rates and the Fed's administered rates, and a growing reliance on the Fed's standing repo operations. Although banking system reserves were characterized as ample, they reside in a sensitive zone where small shifts in demand can lead to higher overnight borrowing costs and liquidity strains.
Seasonal pressures were also noted as potential risk factors. These include year-end reserve drains, shifts occurring in late January, and a surge in spring tax payments into the Treasury's account at the Fed, all of which could sharply reduce reserves and increase the risk of market disruptions.
As a response, the Fed proposed purchasing about $220 billion in short-term Treasury securities during the first year to maintain ample reserves and support smooth market functioning. Additionally, officials sought to enhance the standing repo facility by removing usage caps and clarifying that it is a normal operational tool rather than a last-resort measure.
At the time, market expectations included an anticipated quarter-point rate cut in December and subsequent reductions during 2026. The next FOMC meeting was scheduled for January 27–28, 2026, with the target federal funds rate range at 3.50%–3.75%. According to CME FedWatch data, there was approximately an 85.1% probability of holding rates steady and a 14.9% chance of a cut to 3.25%–3.50%.
