Bank reserves are still ample — but for how much longer? By Investing.com

Barclays analysts caution that while bank reserves remain ample, their abundance may not last much longer. Barclays’ analysis indicates that the transition to a steeper part of the reserve demand curve, where rates start moving higher, could occur when reserves reach around $3.1 trillion.

The analysts anticipate that quantitative tightening (QT) will conclude in December.

Currently, Barclays says reserves are not scarce, as evidenced by the stable FF-IORB spread, which has remained at -7 basis points since the Federal Reserve’s rate hike began.

However, the bank notes that this spread may soon begin to narrow. “Banks’ reserve demand curve is nonlinear, and the sensitivity of the FF-IORB spread to changes in the level of reserves increases as these balances shrink,” the note states.

Barclays highlights the importance of monitoring changes in the slope of the reserve demand curve, or the demand elasticity of the funds rate, to determine the shift from abundant to scarce reserves.

According to their models, banks are nearing the steeper part of this curve, which is estimated to be around $3.1 trillion in reserves, assuming reverse repurchase agreement (RRP) balances are near zero.

They note the Fed faces uncertainty regarding the pace at which QT will push banks into this steeply sloping part of the demand curve.

Barclays points out that the reserve demand curve may have shifted, meaning banks might want to hold more reserves at every level of the FF-IORB spread. In response to these uncertainties, the Fed has begun tapering Treasury roll-offs, signaling a cautious approach.

Barclays concludes, “There are currently no signs of reserve scarcity,” as indicated by the flat and still negative FF-IORB spread and other market indicators. However, the analysts warn that this situation could change, emphasizing the need for close monitoring as the year progresses.’