Similar to prior year-ends, overnight secured money markets experienced rate pressures on and around Dec. 31, 2025. While these pressures were substantial, they were short-lived, and overall market functioning was orderly. Moreover, higher overnight rates in the repurchase agreement, or repo, market did not spill over to the Federal Reserve’s policy rate, the federal funds rate. Orderly conditions over year-end followed recent decisions by the Federal Open Market Committee (FOMC) to resume balance sheet growth and enhance standing repo (SRP) operations. These recent decisions were made to maintain ample liquidity in the financial system and keep the federal funds rate within the target range set by the FOMC.
In this article, we explain how the Fed’s monetary policy implementation toolkit limits money market pressures and keeps rates steady around known pressure points, using the 2025 year-end as an example.
Maintaining Ample Reserves Using the Fed’s Balance Sheet
Upward pressures in money market rates arise when demand for funds, or reserves, exceeds supply. Money market rates and other indicators are helpful in assessing how ample reserves are, and in turn, informing the size of the Fed’s balance sheet. In May 2022, the FOMC laid out plans, explaining that it would stop the runoff of its balance sheet when “reserve balances are somewhat above the level it judges to be consistent with ample reserves.” In line with these plans, at its October 2025 meeting, the FOMC decided to end balance sheet runoff starting Dec. 1. At its December 2025 meeting, the FOMC decided to start reserve management purchases (RMPs) of Treasury bills to maintain an ample level of reserves. An ample level of reserves provides sufficient liquidity to keep the federal funds rate trading within its target range and anchored to the Fed’s administered rates, without the need to actively manage the supply of reserves.
RMPs increase securities held on the asset side of the Fed’s balance sheet and correspondingly increase the supply of reserves on the liability side, ensuring stable funding conditions in money markets. RMPs are generally sized to accommodate changes in demand for Fed liabilities, including the quantity of reserves needed by banks, currency held by the public, and cash held by the U.S. Treasury Department in its Treasury General Account (TGA) at the Fed. Demand for all Fed liabilities generally grows as the U.S. economy grows in size.
Cumulative Changes in Reserves and TGA Near April Tax Date
Source: H.4.1 2022-2025, weekly average levels
Some Fed liabilities have a pronounced seasonal component. For example, the TGA grows sharply around the April tax date, as U.S. households and businesses pay their taxes, before gradually returning to normal levels, as seen in the chart above. Any swings in the TGA cause an equal and opposite swing in reserves, all else equal.
To offset the projected sharp decline in reserve levels in April and consequent upward pressure on money market rates, the New York Fed’s Open Market Trading Desk (the Desk) began conducting RMPs last month and plans to maintain a somewhat elevated pace of monthly Treasury bill purchases until April. As the TGA normalizes after the April tax date, the Desk plans to decrease purchases substantially in subsequent months. Over the longer term, the monthly pace of RMPs may vary depending on projected fluctuations in the demand for reserves and other liabilities. By offsetting changes in reserves, RMPs help maintain ample liquidity and keep the federal funds rate trading within its target range.
The Role of Repo and Reverse Repo Operations
While RMPs are designed to maintain ample reserves by accommodating projected changes in the demand for Fed liabilities, there is uncertainty surrounding those projections. In addition, frictions in money markets, which are often amplified around quarter- and year-ends, can temporarily hinder the smooth redistribution of liquidity in the financial system. Due to these and other factors, RMPs may be unable to fully accommodate unexpected shifts in reserve demand. Repo and reverse repo operations can supplement RMPs by temporarily adding or draining reserves as needed to help maintain rate control.
The Fed offers standing repo (SRP) operations and overnight reverse repo (ON RRP) operations. SRP operations, in which a counterparty sells securities to the Fed with an agreement to repurchase the securities at a specified price on a later date, add reserves and help limit upward pressures on rates. Counterparties are incentivized to conduct repos with the Desk when money market rates exceed the SRP rate, which is set at the top of the FOMC’s target range for the federal funds rate.
Similarly, ON RRP operations, in which the Fed sells securities to a counterparty with an agreement to repurchase the securities at a specified price on a later date, reduce reserves and help limit downward rate pressure. The ON RRP rate is set at the bottom of the target range, incentivizing counterparties to place funds at the ON RRP when private market rates fall below this rate. These operations encourage market participants to redistribute liquidity in the financial system at rates within the target range, and to only transact with the Fed when they cannot trade at rates within the target range.
A Closer Look at Money Market Dynamics Over 2025 Year-End
Typically, money markets, including the repo market, experience volatility around quarter-end and especially year-end dates, due to temporary balance sheet adjustments made by market participants. The repo market experienced notable but expected upward rate pressures over 2025 year-end, but overall money market conditions were orderly. The effective federal funds rate (EFFR), which is calculated based on transactions in the federal funds market, stayed well within its target range.
Overnight Interest Rates (Spread to the Bottom of the Target Range)
While other money market rates, including the secured overnight financing rate (SOFR), increased significantly on year-end, as seen in the chart above, market participants noted that the added liquidity from RMPs removed some of the risk that insufficient liquidity can cause, such as market dislocations and extreme pressures on money market rates. In addition, on Dec. 31, SRP operations saw $75 billion in usage by counterparties, the highest level since standing operations were introduced in 2021. These operations also helped alleviate repo rate pressures. Some market participants noted that the recent changes to SRP operations, including the removal of the aggregate limit and communications clarifying their intended role, may have increased counterparties’ willingness to enter into repos with the Desk on days of elevated rate pressures.
As expected, usage of the ON RRP operation also increased as some market participants limited the size of their balance sheets on year-end. The temporary ON RRP increase was smaller than on 2024 year-end given the lower level of excess liquidity in the financial system and market structure changes, such as the growth in central clearing of repo transactions.
Overall, the Fed’s monetary policy implementation framework and toolkit, including the recent changes by the FOMC, worked well over 2025 year-end, delivering rate control and maintaining money market functioning.
Natalie Leonard is an associate in the New York Fed’s Markets Group.
Dina Marchioni is a director in the New York Fed’s Markets Group.
Hiroya Sato is an associate in the New York Fed’s Markets Group, on secondment from the Bank of Japan.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
