US Money Markets: Bills Buying & Calm Outlook

WASHINGTON, February 29, 2026 — The Federal Reserve is subtly shifting gears, and it’s not just about potential rate cuts. A renewed focus on bank reserves, coupled with a surprisingly active bill-buying program, is calming money markets and could signal a more proactive approach to liquidity than many anticipate.

Fed’s Balancing Act: Rate Cuts, Bill Buying, and the SLR

A complex interplay of factors is shaping the future of monetary policy.

• The Fed has added roughly $80 billion through its bill-buying program since re-igniting it.
• Two rate cuts are currently priced in for June and September, but further cuts appear unlikely in the near term.
• Proposed changes to the Supplementary Leverage Ratio (SLR) could further boost demand for Treasuries and impact repo markets.
• Money market fund inflows remain strong, indicating continued demand for safe, liquid assets.

While markets are pricing in about two rate cuts this year – a view shared by many analysts since the start of 2026 – don’t expect a flood of easing. Current Fed Chair Powell has appeared remarkably balanced, showing no immediate inclination to cut or hike rates, potentially remaining on hold for the duration of his term. The economy, though vulnerable, is demonstrating enough resilience to avoid a recession through 2026.

What’s the ideal fed funds rate? Ideally, the Fed would like to see the effective fund rate drift lower again, as it’s currently 14 basis points above the fund rate floor.

Fed Buying Bills Is Doing its Job and Acting to Support Bank Reserves

Since re-engaging its bill-buying program, the Fed has added approximately $80 billion to its holdings, bringing total bill holdings to nearly $275 billion. Simultaneously, $30 billion in mortgage-backed securities have rolled off the balance sheet, and government bond holdings have also increased. The net result, since mid-December 2025, is a $60 billion increase in the Fed’s securities holdings, partially offset by a rise in the Treasury’s cash balance due to tax inflows. This leaves bank reserves around $3 trillion.

Source: ING estimates, Macrobond

The bill-buying program was initiated to address perceptions of liquidity tightness. However, the effective fed funds rate remains elevated, currently 14 basis points above the fund rate floor – a slight irritation for the Fed. The rate is just one basis point below the rate paid on excess reserves, effectively a ceiling. Despite this, the Fed is likely to view recent developments positively, as repo circumstances have calmed.

Fed Funds Rates Versus the SOFR Rate

The expectation is that the Secured Overnight Financing Rate (SOFR) will trade back through the effective fed funds rate, pulling it down away from the rate paid on excess reserves. The impending easing of the Supplementary Leverage Ratio (SLR) will also have a significant impact.

Source: ING estimates, Macrobond

SOFR Has Eased. It Will Ease Lower on Treasury Cash Payouts

SOFR has remained relatively tight, but is expected to improve as the T-bill program continues to add to bank reserves. A planned $150 billion paydown from the Treasury’s cash balance, boosted by recent tax receipts, will also contribute to easing. Currently, the Fed isn’t significantly adding or withdrawing liquidity, suggesting a degree of balance.

Source: ING estimates, Macrobond

A comfortable level of bank reserves is estimated to be between 9% and 10% of GDP, currently around $3 trillion. The Fed is likely to build reserves at a pace similar to nominal GDP growth (2-5% annually), unless Kevin Warsh’s leadership initiates balance sheet reduction.

Bank Reserves at the Federal Reserve

Source: ING estimates, Macrobond

Money Market Funds Remain Very Much in Vogue, and Little to Suggest Any Change in That

Inflows into money market funds remain robust, with both institutional and retail investors participating. Total money market funds now approach 25% of GDP, nearing the 2009 high of 27%. The rate-cut narrative hasn’t significantly impacted these funds, as a 3-4% return still represents a solid yield for a virtually risk-free investment.

Source: ING estimates, Macrobond

Government Funds are increasing their holdings of Treasury bills, driven by increased bill issuance to alleviate pressure on coupon issuance. This should help maintain a concession in bills. Prime Funds continue to show elevated exposure to repo, with gradually rising exposure to commercial paper and steadier holdings of certificates of deposit and bank deposits.

Money Market Fund Holdings

Source: ING estimates, Macrobond

The Supplementary Reserve Ratio Is Also Set to Be Eased in the Coming Months

Changes to the Supplementary Leverage Ratio (SLR) for large U.S. banks, effective April 1, 2026 (with earlier opt-in possible), could boost demand for Treasuries and impact repo markets. This could skew balance sheets gradually, though banks remain primarily lenders and credit hasn’t been notably constrained. The SLR easing is confirmed and coming.

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