Macro Mechanics #3: Bank Reserves & The “Ample” Floor

Pierce & Pierce Research | January 2026
Part of the Macro Mechanics Series

⏱️ 12-15 minutes • Beginner-friendly • No prior Fed knowledge required

Connection to Previous Briefs: In Brief #1, we covered the TGA—where government cash sits. In Brief #2, the ON RRP buffer—now exhausted. Bank reserves are where those flows ultimately land. This is the liquidity that actually matters for market plumbing.

Why This Matters

In September 2019, overnight lending rates spiked to 10%. The repo market seized up. Banks that needed to borrow cash for a single day suddenly could not find it at any reasonable price. The Federal Reserve had to intervene with emergency injections of $75 billion per day.

The cause? Bank reserves had fallen too low.

In October 2025, something similar started happening. Usage of the Fed’s Standing Repo Facility spiked to $50 billion. Money market rates drifted higher within the Fed’s target range. The Fed announced the end of quantitative tightening and prepared to restart balance sheet expansion.

Current Reserve Status:

Reserves are now below the estimated floor range. This is why the Fed pivoted to active T-bill purchases in December 2025. The plumbing is under stress.

Section 1: What Are Bank Reserves?

Bank reserves are the cash that commercial banks hold in their accounts at the Federal Reserve. Think of it as the bank’s own checking account at the central bank.

Banks use reserves to settle transactions with each other. When you transfer money from your Chase account to a friend’s Wells Fargo account, the underlying settlement involves Chase’s reserve account sending funds to Wells Fargo’s reserve account at the Fed.

Pre-2008 vs Post-2008:

Before 2008, the Fed operated with a small amount of reserves. Banks borrowed and lent reserves constantly in the federal funds market. The Fed controlled rates by adjusting supply.

Then came the financial crisis. The Fed flooded the system with reserves through quantitative easing. Reserve balances exploded from under $50 billion to over $2.8 trillion by 2014.

The key takeaway: Reserves went from scarce (banks needed every dollar) to abundant (banks had more than they could use). The Fed now pays interest on reserves to keep rates where it wants them.

Section 2: The Reserve Framework

The Fed currently operates under an “ample reserves” framework. This sounds simple but contains crucial nuance.

Three Reserve Regimes:

The Problem:

There is no precise number that defines “ample.” The threshold depends on:

Floor Estimates:

The only way to truly discover the floor is to approach it and see what breaks.

Section 3: September 2019 - What Happens When Reserves Are Scarce

The clearest illustration of reserve scarcity came on September 16-17, 2019.

The Setup:

What Happened:

The federal funds rate itself moved above the target range. This represented a loss of monetary policy control. Banks could not access reserves at reasonable prices.

The Fed’s Response:

The Lesson:

Reserves at $1.4 trillion were too low. The system could not handle even normal seasonal pressures. The Fed had overshot on QT and had to reverse course.

Section 4: October 2025 - Warning Signs Return

Fast forward to October 2025. Reserves had declined from post-pandemic peaks above $4 trillion to approximately $3.0 trillion through three years of QT2.

The Warning Indicators:

Comparison: 2019 vs 2025:

The Fed’s Response:

The Fed learned from 2019. Rather than waiting for markets to break, it acted preemptively when warning signs appeared.

Section 5: The “Ample” Floor Estimates

How low can reserves go before stress emerges?

Official Guidance:

Fed Chair Powell and other officials have described the target as maintaining reserves “somewhat above” the level where scarcity pressures emerge. They explicitly avoid naming a specific number.

Why the Uncertainty:

Current Assessment:

November 2025 data now confirms reserves have fallen below the $2.9T floor estimate. The October 2025 stress at roughly $3.0 trillion was an early warning. The Fed’s pivot to T-bill purchases was timely.

Section 6: Where We Are Now

Current Reserve Dashboard (January 2026):

Reserve Trajectory:

Projection (Fed operations only, assumes TGA neutral):

Note: This projection isolates Fed T-bill purchases (~$40B/month) and doesn’t account for TGA movements or other balance sheet dynamics which could accelerate or offset these flows.

The Fed has indicated that initial T-bill purchases will be “elevated” through April 2026 and then reduced. The urgency is real—reserves are below floor.

Section 7: Thesis Connection

For Pierce & Pierce readers, reserve levels provide the fundamental constraint on the liquidity thesis.

Why Reserves Matter for Risk Assets:

Combined Injection Channels:

⚠️ Transmission Caveats:

More reserves do not automatically mean higher asset prices. The relationship requires several transmission steps:

But the structural setup is supportive: multiple injection channels, no absorption buffer, reserves below floor with Fed actively managing to rebuild.

Section 8: What To Watch

Primary Data Sources:

Reserve Level Interpretation:

Warning Signs to Monitor:

The Reserve Pressure Formula:

Reserve Pressure = EFFR - (Bottom of target range)

Current: 3.58% - 3.50% = +8 bps → Ample, no stress

Quick Reference

What’s Next

Brief #4: QT → QE (Balance Sheet Cycles)
How Fed balance sheet policy actually works, what changed in December 2025, and why “reserve management purchases” are different from QE.

Brief #5: Global M2 & The Liquidity Lag
Why Bitcoin correlates with money supply, why the lag typically runs 70-90 days, and what the current divergence tells us.

Sources:
Federal Reserve Economic Data (FRED) | NY Fed Open Market Operations | FOMC Meeting Minutes and Statements | Federal Reserve Staff Working Papers | Brookings Institution Repo Market Analysis | Office of Financial Research | NY Fed Liberty Street Economics

Methodology Note:
Reserve data from FRED series WRESBAL through December 10, 2025. September 2019 analysis from Federal Reserve staff notes and NY Fed research. October 2025 analysis from FOMC statements and Fed operations data. All figures represent publicly available data from official sources.

This publication is for educational purposes only. Not financial advice. Cryptocurrency investments carry substantial risk of complete loss.

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