In a FEDS Note, Federal Reserve Board staff argue that the cash-lending behaviour of key nonbank participants in overnight funding markets can provide earlier, more informative signals of reserve scarcity than standard aggregate indicators. The note develops four indicators based on money market funds (MMFs) in repo markets and the Federal Home Loan Banks (FHLBs) in the federal funds market, and finds they would have pointed to rising pressures well ahead of the September 2019 money market rate spikes. The proposed measures track the share of MMF repo lending above the interest rate on reserve balances (IORB), the sensitivity of MMF repo spreads to changes in the Treasury General Account (TGA), volumes and rates in the “true” domestic interbank federal funds segment that excludes FHLBs as lenders, and the extent of FHLB federal funds lending at rates below their repo rates. The analysis highlights that as reserves fall, banks tend to pull back from lending in overnight markets, making MMFs a more important marginal cash provider, while FHLB dominance in federal funds lending can dampen the usefulness of the effective federal funds rate and aggregate volumes as early scarcity gauges. Across the four indicators, the note concludes that reserves currently remain abundant, although two measures showed temporary signs consistent with emerging scarcity in the fourth quarter of 2024, reinforcing the case for continued monitoring as balance sheet shrinkage proceeds.

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