The Fed's Biggest Focus This Week: Not Rate Cuts, but Whether to Inject New Liquidity into the Market

BlockBeats News, December 8th. Despite the market seemingly having taken another interest rate cut by the Federal Reserve as a foregone conclusion and driving the U.S. stock market to near historic highs last Friday, the true driving force for the stock market and other risk assets in this bull market may not actually come from interest rates. After quietly ending its balance sheet reduction, how the Federal Reserve manages its massive balance sheet and whether it will inject new liquidity into the market may be the key.

The global rate strategy team at Bank of America predicted last Friday that the Federal Reserve will announce this week that it will start purchasing Treasury securities with maturities of one year or less at a pace of $45 billion per month starting in January as part of a "reserve management operation."

Others believe that this may take more time and that the Federal Reserve may not need to take excessive action to maintain market stability. Roger Hallam, Global Head of Rates at Vanguard Fixed Income Group, expects that the Federal Reserve will begin purchasing Treasury securities at a pace of $15 billion to $20 billion per month at the end of the first quarter or beginning of the second quarter of next year.

Kelley from PineBridge expects the Federal Reserve to cut interest rates by another 25 basis points on December 10th, bringing the policy rate to a range of 3.5%-3.75%, getting closer to the historical neutral rate of around 3% aimed at maintaining economic stability. (FX678)