Not just interest rate cuts? Former New York Fed expert: Powell may announce a $45 billion bond purchase plan next Wednesday

As the Federal Reserve's interest rate meeting on December 10 approaches next week, the market is not only focused on the anticipated interest rate cut, but senior strategists on Wall Street point out that the Federal Reserve may soon announce a significant asset balance sheet expansion plan.

Recently, former New York Fed repo expert and Bank of America interest rate strategist Mark Cabana predicted that in addition to the widely expected 25 basis point rate cut, Federal Reserve Chairman Jerome Powell will announce a plan to purchase $45 billion in Treasury bills (T-bills) monthly next Wednesday, with this bond-buying operation officially starting in January 2026, aimed at preventing further spikes in repo market rates by injecting liquidity into the system.

Cabana warned in his report that while the interest rate market has reacted mildly to the rate cut, investors generally "underestimate" the Federal Reserve's actions regarding the balance sheet. He pointed out that the current level of money market interest rates indicates that the banking system's reserves are no longer "ample," and the Federal Reserve must fill the liquidity gap by restarting bond purchases. Meanwhile, UBS's trading department also provided a similar forecast, believing that the Federal Reserve will begin purchasing about $40 billion in Treasury bills monthly in early 2026 to maintain stability in the short-term interest rate market.

This potential policy adjustment occurs during a critical period of leadership transition at the Federal Reserve. As Powell's term nears its end and market expectations rise for Kevin Hassett to possibly succeed him as Federal Reserve Chairman, next week's meeting will not only concern short-term liquidity but will also set the tone for the monetary policy path for the coming year.

Former New York Fed Expert Predicts: $45 Billion Monthly Bond Purchases

Although the market consensus has locked in a 25 basis point rate cut by the Federal Reserve next week, Mark Cabana believes the real variable lies in the balance sheet policy. In his weekly report titled "Hasset-Backed Securities," he pointed out that the scale of the RMP that the Federal Reserve will announce could be as high as $45 billion per month, a prediction that greatly exceeds the current market expectations.

Cabana detailed the composition of this figure: the Federal Reserve needs to purchase at least $20 billion monthly to address the natural growth of its liabilities, and additionally needs to purchase $25 billion to reverse the reserve loss caused by previous "excessive balance sheet reduction." He expects this level of bond buying to last at least 6 months. This statement is expected to be included in the Federal Reserve's execution instructions and detailed operational scale and frequency will be published on the New York Fed's website, with a focus on the Treasury bill market.

According to a previous article by Wall Street Insights, since the asset balance sheet peaked at nearly $9 trillion in 2022, the Federal Reserve's quantitative tightening policy has reduced its size by about $2.4 trillion, effectively withdrawing liquidity from the financial system. However, even though QT has stopped, signs of funding stress remain evident The clearest signal comes from the repurchase market. As the short-term financing hub of the financial system, the overnight reference rates in the repurchase market, such as the Secured Overnight Financing Rate (SOFR) and the Tri-Party General Collateral Repo Rate (TGCR), have frequently and dramatically breached the upper limit of the Federal Reserve's policy rate corridor in recent months. This indicates that the level of reserves within the banking system is sliding from "ample" to "adequate," with a risk of further moving towards "scarce." Given the systemic importance of the repurchase market, this situation is considered difficult for the Federal Reserve to tolerate in the long term, as it may weaken the transmission efficiency of monetary policy.

In this context, recent statements from Federal Reserve officials also suggest the urgency for action. New York Fed President John Williams has stated that "we expect to reach ample reserve levels soon," while Dallas Fed President Lorie Logan has also pointed out that "it is appropriate to expect a resumption of balance sheet growth soon." Cabana interprets "soon" (will not be long) as referring to the December FOMC meeting.

Auxiliary Tools Aimed at Smoothing Year-End Volatility

In addition to the long-term bond-buying program, to address the upcoming year-end funding volatility, Bank of America expects the Federal Reserve to announce term repo operations lasting 1-2 weeks. Cabana believes that the pricing of these operations may be set at the level of the Standing Repo Facility (SRF) rate or 5 basis points above it, aiming to reduce tail risks in the year-end funding market.

Regarding interest rate management, although clients have inquired whether the Interest on Reserves (IOR) will be lowered, Cabana believes that simply lowering the IOR "does not solve any problems," as banks generally prefer to hold higher cash buffers following the collapse of Silicon Valley Bank (SVB). He thinks it is more likely that both the IOR and SRF rates will be synchronized down by 5 basis points, but this is not the baseline scenario.

Another important background for this meeting is the personnel changes the Federal Reserve is about to face. The market currently views Kevin Hassett as a strong contender for the next Federal Reserve Chair. Cabana points out that once the new chairperson is determined, the market will price the mid-term policy path more according to the guidance of the new appointee.

UBS also agrees with the view of a return to balance sheet expansion. UBS's sales and trading department points out that the Federal Reserve can shorten the duration of assets by purchasing Treasury securities, thereby better matching the average duration of the Treasury market. Whether this operation is called RMP or quantitative easing (QE), its ultimate goal is clear: to ensure that financial markets can maintain smooth operations during critical periods of political and economic transition through direct liquidity injections Risk Warning and Disclaimer

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