The Specter of Funding Stress

October 27, 2025 — In a previous Notes prior to the September FOMC meeting, we wrote that the Fed’s balance sheet runoff and increased Treasury bill issuance will continue to expose potential funding stress, especially with the overnight reverse repo facility (RRP) nearly depleted. Incremental Treasury bill issuance now directly reduces bank reserve balances, draining liquidity from the financial system. This means that the Fed could soon slow or stop shrinking its balance sheet, which would serve as an additional tailwind for lower rates in the months to come.