Several participants at the Federal Reserve’s September policy meeting noted the importance of keeping a close eye on money market conditions — and of gauging just how “ample” bank reserves still are — as the central bank continues the slow unwind of its once-bloated balance sheet.

Those comments came amid persistent strains in US money markets. As bank reserves parked at the Fed shrink, signs are mounting that the central bank’s grand “quantitative tightening” experiment may be nearing its natural — and political — limits.

According to the minutes released on Wednesday, some officials observed that the Fed’s standing repo facility, its liquidity backstop of last resort, would help keep the federal funds rate within target and prevent any short-term funding stress from derailing the balance-sheet runoff. In other words, the Fed has its fire hose ready — just in case it sets its own house alight.

Meanwhile, the Treasury has been busy refilling its coffers after July’s debt ceiling drama by ramping up bill issuance to record levels, sucking liquidity from elsewhere in the system — notably from the Fed’s overnight reverse repo facility and from bank reserves themselves. On Tuesday, the Treasury announced plans for another record round of bill sales and hinted more were on the way.

The flood of supply has nudged yields higher across the curve. Overnight repo rates secured by Treasuries now hover around the Fed’s interest rate on reserves — a clear sign that funding costs are not about to ease. Bank reserves have meanwhile slipped below $3 trillion, their lowest level since January, and continue to fall.

Since 2022, the Fed has been gradually shrinking its balance sheet — reversing trillions in post-pandemic asset purchases in what it politely calls “balance-sheet normalisation.” Earlier this year, officials slowed the pace of runoff by trimming the monthly cap on Treasury maturities, effectively acknowledging that “normal” may be closer than they’d like to admit.

Fed Chair Jerome Powell insisted last month that reserves remain “ample” — central-bank speak for “we hope the plumbing doesn’t break.” He admitted, however, that they’re getting close to the lower bound. Governor Christopher Waller once pegged that “ample” threshold at roughly $2.7 trillion — and the system is inching there fast.

Julie Remache, deputy manager of the System Open Market Account, told the meeting that if the runoff continues at its current pace, the Fed’s portfolio will shrink to just above $6 trillion by the end of March. That would leave reserves hovering around $2.8 trillion by March 2026 — still ample, perhaps, but not exactly generous.

Not everyone agrees on how lean the Fed should get. Vice Chair for Supervision Michelle Bowman argues the central bank should aim for the smallest balance sheet possible, with reserves closer to “scarce” than “ample.” Powell, Remache, and others prefer to stop before things start creaking — likely by year-end.

The debate, in short, pits the minimalists against the pragmatists: one camp keen to prove fiscal discipline, the other quietly aware that breaking the plumbing would be a very expensive way to save face.