Fed Funds Rate May Edge Higher as Bank Reserves Shrink

Reporter Summary

The effective federal funds rate, which has sat near the lower end of the US Federal Reserve’s target range for two years, could soon rise as excess reserves in the banking system dwindle faster than expected. Analysts warn that Treasury bill issuance and tightening liquidity are beginning to pressure short-term rates.

Liquidity Pressures

Since July, increased issuance of short-term US Treasuries has drawn funds away from money markets, sparking concern about an oversupply of bills. Although the fed funds rate usually shifts only when the Fed adjusts policy, a move outside those periods could flag tighter financial conditions.

“A move higher is getting closer sooner than we expected,” wrote Lou Crandall, senior economist at Wrightson ICAP, who noted the rate may be “flirting with an uptick from 4.08% to 4.09%.”

Reserves in Focus

Commercial bank reserves at the Fed have been falling, with foreign bank balances declining faster than those of US institutions. Fed data shows reserves stand just above US$3 trillion. Fed governor Christopher Waller estimates US$2.7 trillion is the lowest level needed to avoid market disruptions.

Strategists are tracking the Fed’s overnight lending facility, a long-standing liquidity gauge, which has dropped to a four-year low in usage.

Shift in Market Dynamics

The fed funds market once signalled tightening conditions through interbank lending. But post-crisis monetary stimulus left banks awash in cash, reducing activity. As reserves shrink, transaction volumes have fallen, with foreign banks scaling back arbitrage trades that once supported fed funds activity.

Fed funds trading volumes have slipped below US$100 billion after averaging about US$113 billion since April, according to Wrightson ICAP.

Strategist Views

Citigroup’s Jason Williams and Alejandra Vazquez Plata say they have yet to see sufficient reserve shifts to warrant an immediate rise but note the benchmark could climb by one to two basis points toward year-end. Bank of America’s Mark Cabana and Katie Craig added that it may take sustained moves in other money-market rates to nudge fed funds higher.

Key Watchpoints

• Foreign bank cash: Balances fell US$255 billion in the three weeks to Sep 10, the steepest drop since late 2024.
• Fed funds volume: Domestic bank participation remains muted, averaging 7% in 1Q 2025, well below 2018 levels.
• 75th percentile rate: A recent uptick hints at higher bank funding costs, often a precursor to a shift in the fed funds median rate.

With reserves tightening, Wall Street is bracing for the possibility that the fed funds rate edges higher in the coming weeks, a move that would underscore shifting financial conditions in US funding markets.

Oil Prices Dip on Oversupply Fears Despite Geopolitical Tensions

Reporter Summary

Oil prices settled slightly lower on Monday as concerns of oversupply outweighed geopolitical risks stemming from Russia and the Middle East.

Market Moves

Brent crude futures slipped 11 cents, or 0.2%, to close at US$66.57 a barrel, remaining within the US$65.50–US$69 trading range seen since early August.

US West Texas Intermediate (WTI) October contract expired at US$62.64 a barrel, down 4 cents, or 0.1%. The more actively traded second-month WTI fell 12 cents, or 0.2%, to US$62.28.

Analyst View

“Traders are back to focusing on a possibly over-supplied global oil market that is soon to come, unless the U.S. and EU can agree on harsher tariffs on countries that purchase Russian crude,” said Dennis Kissler, senior vice-president of trading at BOK Financial.

Production Outlook

Iraq, Opec’s second-largest producer, has increased exports under its Opec+ pact, with September shipments expected at 3.4–3.45 million barrels per day (bpd), according to state oil marketer SOMO.

Kuwait’s oil production capacity now stands at 3.2 million bpd, its highest in over a decade, Oil Minister Tariq Al-Roumi told local daily Al Qabas.

Global Context

US equities, which often move in tandem with oil, slipped as markets weighed immigration policy shifts and speculation about the Federal Reserve’s rate path. Fed officials signalled caution on further cuts while inflation remains above 2% and employment strong.

Meanwhile, tensions escalated after several Western nations recognised a Palestinian state and Estonia accused Russia of violating its airspace. Neither event caused immediate supply disruptions.

Outlook

Analysts at SEB expect global oil demand to taper from Q3 2025 into early 2026 as Opec+ ramps up production. “The big question is if China will stockpile the surplus or if oil will slide into the US$50s. We believe the latter,” they said.

Sources also told Reuters that Iraq has given preliminary approval to resume pipeline oil exports from its Kurdistan region through Turkey.

SGX Rolls Out iEdge Singapore Next 50 Indices to Broaden Mid-Cap Visibility

Reporter Summary

Singapore Exchange (SGX) has introduced two new benchmarks — the iEdge Singapore Next 50 Index and the iEdge Singapore Next 50 Liquidity Weighted Index — to track the performance of the 50 largest and most liquid companies listed on the mainboard outside the Straits Times Index (STI).

Launched on Sep 22, the indices aim to broaden exposure to mid-cap names, boost visibility of listed companies beyond the STI and offer investors new avenues for diversification across sectors.

iEdge Singapore Next 50 Index

This market-capitalisation weighted index measures the performance of the next 50 largest SGX mainboard-listed firms beyond the 30 STI constituents. It includes companies across industrials, financials, energy and real estate investment trusts.

The index serves as a barometer for Singapore’s mid-cap segment. Its latest 12-month dividend yield stands at 5.85%, according to SGX Indices. Weighting is based on free-float market capitalisation, which accounts only for shares available for public trading.

iEdge Singapore Next 50 Liquidity Weighted Index

This version tracks the same basket of 50 stocks but weights them by liquidity. Each constituent’s weight is determined by its median daily trading value, giving greater prominence to actively traded names.

The approach emphasises stocks most relevant to active traders while still reflecting the mid-cap universe represented in the iEdge Singapore Next 50 Index.

Performance & Comparisons

Both new indices have returned more than 24% so far this year, outpacing the STI’s 18.6% gain, SGX data shows. Constituents span a diverse mix of sectors including real estate, industrials, financials and energy.

The Straits Times Index

The STI is a market-capitalisation weighted benchmark of the 30 largest and most liquid Singapore-listed companies, covering about 85% of the local equity market by capitalisation as at August.

The three local banks — led by DBS — account for more than half the index. Other notable names include Singtel, Singapore Airlines, ST Engineering and Keppel.

Roughly half the STI constituents’ revenue is generated overseas, providing investors both domestic and global exposure. The index’s dividend yield is 4.48%, according to FTSE Russell.

Dating back to 1966 and originally named the Straits Times Industrial Index, the STI reflects Singapore’s growth ambitions. It was renamed in 1998.