KBRA Financial Intelligence

Record Bank Deposits Reflect Fed’s Role in Reshaping U.S. Money Supply

Bank Deposits Surge Amid Fed Rate Cuts

Total commercial bank deposits reached an all-time high early this month, surpassing $18.5 trillion. Not only are bank deposits on the rise, but their year-over-year (YoY) growth rate has ranged between 3.9%-4.1% throughout October, well above the 52-week moving average of 3.2%.

Though KBRA Financial Intelligence (KFI) recently noted that bank deposit growth slowed from the prior quarter in 2Q 2025, the subsequent acceleration in deposit figures collected within Federal Reserve data covering the July-September period will likely flow through to bank call reports for the third quarter. When all 3Q call reports are reported to the FFIEC and added to our database, KFI will publish the next iteration of our Quarterly Banking Overview covering changes to critical asset, income, and funding metrics throughout the U.S. banking sector.

Recent monetary policy developments come as the Fed has resumed interest rate cuts and is now on the verge of concluding a three-year spate of balance sheet reductions in December. The balance sheet runoff has slashed the size of the central bank’s total asset holdings by more than $2.2 trillion (greater than one-fifth) since mid-2022. These developments will play a critical role in shaping the ongoing transformation of the U.S. money supply, as gauged by U.S. monetary aggregates known as M2 and M1.

What the Money Supply Signals About Bank Deposits

The M1 gauge of the money supply includes currency outside of the U.S. Treasury, Federal Reserve Banks, and depository institution vaults, as well as demand deposits and other liquid deposits. The growth of M1 has accelerated significantly amid growing expectations of more aggressive monetary easing at the Fed. For its part, M2 encompasses the M1 money stock, along with small-denomination time deposits (less than $100,000) and retail money market funds. In banking terms, the M2 and M1 gauges are analogous to interest-bearing and non-interest-bearing liabilities, respectively. If current trends continue, it is likely that M1 expansion will exceed growth in the broader M2 monetary aggregate soon.

As KFI noted in a previous Insights report, the increasing rate of money-supply expansion follows the largest historical contractions of both monetary aggregates during 2022-23. The decline was driven by rate hikes and a multi-trillion-dollar reduction of the Fed’s balance sheet, which pulled vast sums of liquidity from the economy. So far, M2 has rebounded more sharply than M1 because high interest rates have continued to attract substantial capital to interest-bearing accounts. Money market fund investments reached $7.5 trillion in 2Q 2025, while the total of large- and small-denomination time deposits at U.S. commercial banks were worth roughly $2.9 trillion. With the Fed set to end its balance sheet reduction this year, and monetary policymakers potentially reducing rates further into 2026, the renewed expansion of the money supply could continue to accelerate.

Analyzing Time Deposit Compositions

Historically, lower rates tend to boost demand for liquidity over yield, slowing or reversing the accumulation of interest-bearing liabilities such as time deposits. Instead, demand deposits and other checkable deposits, which typically pay no interest or offer variable rates that can be adjusted downward, tend to grow more quickly.

The average cost of time deposits across all U.S. banks was 3.77% in 2Q 2025, down 25 basis points (bps) from the same period in the year prior. While many banks will broadly benefit from easing rates, which are likely to usher in stronger demand-deposit growth, institutions that have built up large concentrations of time deposits with extended maturities may continue to struggle with elevated funding pressure. Although smaller banks generally pay lower rates of interest on their time deposits, a larger share of these liabilities carry maturities extending beyond one year.

That can be disadvantageous when rates are falling, as it will take longer for banks holding extended deposit maturities to bring down current deposit-cost levels. If Fed cuts to short-term rates continue dragging down long-term yields, longer outstanding maturities on time deposits acquired when rates were higher could compress net interest margins (NIM), reducing lending profitability. Since reaching a 2025 peak of around 4.9% in January, the 10-year U.S. Treasury yield has fallen by nearly 100 bps and recently slipped below 4%.