Funds parked at a major Federal Reserve facility dropped to the lowest level in more than four years, putting in focus the amount of cash banks have sitting at the US central bank, a measure of liquidity conditions.

Some 14 participants on Thursday put a combined $28.8 billion at the Fed’s overnight reverse repurchase agreement facility, known as the RRP, which is used by banks, government-sponsored enterprises and money-market mutual funds to earn interest on cash lent to the central bank. It’s the lowest since April 2021, according to New York Fed data. The number of bidders was also the smallest since that period. 

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Usage of the Fed’s overnight reverse repurchase agreement facility, long considered a measure of excess liquidity in funding markets, has been dropping as the Treasury Department issues more short-dated debt to finance the growing deficit, luring cash away from a key backstop source of funding. 

Once the so-called RRP is nearly empty, cash will start draining from bank reserve balances. These reserves are critical in providing a cushion for markets and determining levels necessary to keep them running smoothly. They can also dictate how far the Fed can go in shrinking its balance sheet.

Balances have dropped from $214 billion on the last day of July as the Treasury continues issuing billions of dollars of T-bills in order to replenish its cash balance following last month’s increase of the debt ceiling. Citigroup strategists Jason Williams and Alejandra Vazquez Plata estimate use could approach zero by the end of August. They define empty as the “zero to $20 billion-ish” range. 

While money-market funds, which comprise the biggest RRP users, may opt to keep some cash at the central bank for liquidity purposes, the dwindling balances leave almost no cushion for banks. 

“With RRP balances close to zero, there’s no additional buffer to watch, so reserves are the going to be closely watched,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. “The big question, however, is how low reserves are likely to fall before the Fed fully discontinues balance sheet runoff.”

The Fed has been unwinding its holdings of debt since June 2022. In April policymakers slowed the pace of the runoff by reducing the cap on the amount of Treasuries allowed to mature each month without being reinvested to $5 billion from $25 billion. The cap on mortgage-backed securities was left unchanged at $35 billion. 

Reserves were little changed at $3.3 trillion, according to the latest Fed data, suggesting balances are still in abundant territory. Barclays strategist Samuel Earl said in a note to clients Thursday he expects aggregate balances to fall below $3 trillion by mid-September and below $2.9 trillion by the end of that month, excluding changes in the RRP. 

Fed Governor Christopher Waller, who is reportedly on the shortlist of candidates being considered by President Donald Trump to be the next Fed chair, said last month the US central bank should be able to lower the level of bank reserves to around $2.7 trillion without putting strain on bank reserves.