Fed Decision Preview: More Important than Rate Cut is Balance Sheet Signal

BlockBeats News, December 9th, the Federal Reserve officially ended its balance sheet reduction on December 1st, with bank reserves dropping to levels comparable to the historical period of funding stress. The Secured Overnight Financing Rate (SOFR) also periodically tested the upper end of the policy rate corridor, indicating that the U.S. banking system is gradually facing liquidity tightness.

Against this backdrop, the most important signal from the FOMC may not be a 25 basis point rate cut, but rather the direction of its balance sheet strategy. The Federal Reserve is expected to clearly outline through its implementation note how it plans to transition to a Reserve Management Purchase (RMP) program. According to Evercore ISI, this program could potentially start as early as January 2026, with monthly purchases of around $35 billion in Treasury securities, leading to an annual balance sheet expansion of over $400 billion.

Despite the Federal Reserve still holding nearly $6 trillion in Treasury and Mortgage-Backed Securities, this amount is expected to increase once again. Federal Reserve Governor Waller recently stated that this move is crucial to maintaining order in the repo market and the smooth transmission of Federal Reserve monetary policy. Bank of America predicts that the Federal Reserve will announce a monthly purchase plan of around $45 billion for such "reserve management purchases" at the end of this week's meeting.