The Federal Reserve’s balance sheet size and composition significantly influence short-term funding markets, particularly the overnight Treasury repo market, which serves as a key transmission channel for monetary policy. A December 2025 FOMC decision to maintain ample reserves through Treasury security purchases highlighted the dual constraints on balance sheet size: bank reserve demand and non-bank liquidity demand. Empirical analysis shows repo rates respond to Treasury issuance, dealer holdings, and money market fund liquidity. The September 2019 repo spike demonstrated how low liquidity and simultaneous supply-demand shocks can disrupt markets, affecting the effective federal funds rate. The study underscores the importance of monitoring repo market dynamics to understand how balance sheet policy impacts broader financial conditions and monetary policy implementation.
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