Federal Reserve bank reserves fell by $88.236 billion between September 23 and 30

Federal Reserve bank reserves fell by US$88.236 billion between September 23 and 30.

According to the Federal Reserve's H.4.1 report released on October 1, as of Wednesday, September 30, the Federal Reserve bank's reserve balance was US$2,881,686 million. A previous report showed a balance of $2,969,922 million on Wednesday, September 23. This means that reserves fell by $88.236 billion over a seven-day time point comparison.

However, this headline figure only tells half the story: the weekly average is moving in the opposite direction.

Two major liability factors driving reserve outflows

This significant outflow is mainly driven by changes in two Fed liabilities. First, the Treasury's General Account (TGA) rose to $984,046 million on September 30, an increase of $36.729 billion, drawing money from the banking system. Secondly, the total reverse repo agreement balance climbed US$41.158 billion to US$361,883 million; of which, foreign official and international accounts were accounted for an increase of US$30.080 billion to US$350,344 million.

This is the result of the operation of the end-of-season mechanism. Tax payments and government revenue flowed into the TGA, while banks and foreign central banks deposited cash in reverse repo agreements, causing Wednesday's snapshot data to appear compressed. This pattern repeats every three months. The data is true, but the narrative of "structural liquidity collapse" is not currently supported by data.

Although snapshots show decline, weekly averages increase

The following data reconstructs this narrative. The weekly average of reserves for the week ended September 30 recorded US$2,948,090 million, up from US$2,930,193 million for the week ended September 23, an increase of US$17.897 billion.

Weekly averages smoothed out one-day fluctuations captured in Wednesday's snapshot. When there is a significant divergence between the two indicators, as shown in this example, it usually means a large swing during the week rather than a persistent trend. Although reserves ended Wednesday low, the average level of reserves was actually higher throughout the week.

This model is similar to the impact of legislative changes on the liquidity of bank deposits: it may create temporary liquidity mismatches, but does not herald a fundamental shift in the availability of reserves across the system.

Actual situation in the financing market on September 30

The Guaranteed Overnight Financing Rate (SOFR) can more clearly reflect whether the decline in reserves translates into actual financing pressure. The New York Fed reported that the median SOFR on September 30 was 3.90%, the 99th percentile interest rate was 3.99%, and the underlying trading volume reached US$3.230 trillion. As defined by the New York Fed, SOFR is "a broad measure of the cost of overnight cash borrowing backed by treasury bonds."

A typical tight season end usually shows up with a 99th percentile SOFR well above the median, as the most cash-strapped borrowers pay a premium. A spread of only 9 basis points between the median and the 99th percentile, and facing $3.2 trillion in trading volume, does not describe a financing squeeze. The "pipes" of the financial system remain solid.

Enlightenment for readers from two reserve indicators

The drop in the endpoint of September 30 of US$88.236 billion and the increase in the weekly average of US$17.897 billion are measures of the same system through different perspectives. Looking at any number alone, it is impossible to tell whether bank reserves are structurally tight or abundant; but when taken together, it shows that September 30 was just a low point in a week that was slightly above average.

Analysts have warned that reserve endpoint data alone cannot establish a mechanism to squeeze and transmit liquidity to the crypto market or Bitcoin; before reaching relevant conclusions, direct evidence is needed to link bank financing status to the availability of crypto credit.

At the time of publication of this article, the Crypto Fear and Greed Index was 65 (Greed), and the Bitcoin transaction price was close to US$84,764. None of these readings support digital asset liquidity pressure events caused by changes in reserves.

The next release of H.4.1 will show whether the rebound suggested by the weekly average on Wednesday will continue into October, or whether a drop in the endpoint is a leading sign of more sustained change. This is the number worthy of attention.