The massive debt is weighing down on the US government, and Federal Reserve Chairman Powell suggests restarting balance sheet expansion and prioritizing the purchase of short-term US Treasuries.

As the size of U.S. debt and budget deficits continue to grow, coupled with the possibility of major U.S. debt holders such as China and Japan reducing their holdings significantly under the new round of trade wars and "de-globalization", the likelihood of the Fed restarting the so-called "expansion of the balance sheet" process is increasing. This is to alleviate the heavy pressure faced by the U.S. government in terms of principal and interest payments on U.S. debt and the overall debt burden of the country. It is understood that Lorie Logan, the President of the Dallas Fed who will have voting rights on FOMC monetary policy in 2026, recently proposed a "mid-term policy framework suggestion", advocating that when the Fed restarts its asset purchase program, or the expansion of the balance sheet, it should prioritize increasing its holdings of short-term U.S. Treasury bonds from a medium-term perspective. This would accelerate the optimization of the term structure and achieve dynamic matching between the asset and liability side of the balance sheet and the structure of U.S. Treasury bond issuance. This also means that short-term U.S. Treasuries are likely to see an accelerated upward trajectory. Undoubtedly, the Fed is still in a "balance sheet reduction" cycle, continuously reducing the size of its holdings of U.S. Treasury bonds and mortgage-backed securities (MBS). Therefore, it is very rare for Fed officials to signal an expansion of the balance sheet during this period. Logan emphasized that when monetary policy transitions require a restart of the balance sheet expansion process, the Fed decision-making body should actively increase the allocation of short-term bond combinations to push the Fed's balance sheet to return to a neutral structure more quickly. "Although in the long term, balancing the term structure of U.S. Treasury assets to more quickly restore the Fed's holdings of U.S. Treasury assets to an ideal neutral configuration, overallocating short-term bonds in the medium term will accelerate the adjustment towards neutralizing the asset portfolio," Logan said during her speech at an asset-liability policy discussion seminar in London. This senior official, who previously managed the central bank's asset purchase portfolio at the New York Fed, expressed support for the Fed's current ample reserve system and proposed several optimization paths to enhance policy transmission efficiency, enabling the system to operate effectively and efficiently. U.S. debt interest payments and budget deficits remain high, and the U.S. government appears to be struggling. According to statistics, the Fed's $6.8 trillion balance sheet currently includes around $2.2 trillion in institution-held MBS, but most Fed policy makers have explicitly stated that the future composition of assets will be dominated by U.S. Treasury bonds of various maturities. Logan pointed out in her latest speech: "Asset-liability duration matching will effectively dampen the volatility of the U.S. Treasury bond market, thereby strengthening the effectiveness and efficiency of Fed monetary policy communication." Since the Fed officially began shrinking its balance sheet in June 2022 (also known as quantitative tightening, or QT), the Fed has allowed for a monthly reduction of $250 billion in U.S. Treasury securities of various maturities and $350 billion in MBS that naturally mature and no longer reinvested to proceed with its balance sheet shrinking process. Compared to the initially monthly pace of $600 billion in Treasury reductions, the current pace of balance sheet reduction has significantly slowed down due to the increasing pressure from U.S. Treasury repayment and interest payments, as well as the nearing end of the anti-inflation process. It is understood that in January of this yea... (The translation exceeds the character limit. To see more, please visit https://pastebin.com/EqSGcF4u)Exceeding defense spending. According to the Congressional Budget Office (CBO), the budget deficit is projected to expand significantly to $2.9 trillion in the fiscal year 2034, with a cumulative budget deficit of $22 trillion for the fiscal years 2025-2034. The CBO also predicts that net interest spending will reach a new historical high in the fiscal year 2025, approaching $1 trillion, accounting for 3.4% of GDP, exceeding the previous historical record of 3.2% set in 1991. It is estimated that by the fiscal year 2034, net interest spending will reach nearly $1.7 trillion, accounting for 4.1% of GDP.Adequate Reserves System As one of the strong supporters of the "adequate reserves system" established after the 2008 global financial crisis, Dallas Fed President Logan reiterated her firm support for this framework. "Although in theory monetary policy can still be implemented through scarce reserves, the evolution of market structure in the post-crisis era has made precise control of reserve supply more challenging," she analyzed. "The adequate reserves system greatly simplifies the interest rate control mechanism, effectively reducing the frequency and precision requirements for central banks such as the Fed to respond to fluctuations in reserve supply and demand." Major central banks around the world are advancing the innovation of monetary and interest rate policy frameworks in the post-financial crisis era. While the European Central Bank, the Bank of England, the Reserve Bank of Australia, the Reserve Bank of New Zealand, and other central bank institutions are taking different reform paths, Logan pointed out that global central bank balance sheet management is showing typical convergence characteristics. "Surface differences reflect the adaptive adjustments of each central bank to their domestic financial ecosystems," she emphasized in her speech. Logan also suggested developing new discount window tools to eliminate the stigmatization of commercial banks using emergency lending facilities through a daily quota auction mechanism. However, this hawkish Fed official clearly opposed efforts to revive and restore the federal funds overnight lending market, stating, "Only a significant interest rate differential between the money market rate and reserve rate could activate the interbank market, but this would severely undermine the Fed's monetary policy transmission efficiency." If the Fed stops the current balance sheet reduction, global financial markets may experience a "liquidity bonanza." Generally, when the Fed directly buys bonds (quantitative easing, or QE, also known as "balancing the sheet") or stops shrinking the balance sheet (stopping the reduction process), both mean that financial market liquidity will be significantly improved and promoted. When the Fed buys bonds, it is effectively exchanging the bonds held by banks for cash. These cash funds are deposited in the banking system in the form of reserves, increasing the money supply within the banking system. This means that banks can provide more loans, thereby promoting investment and consumption. And by purchasing long-term bonds, the Fed raises the prices of these bonds, lowering their yield (i.e., long-term interest rates in the financial market), and lower long-term interest rates encourage borrowing by businesses and consumers, stimulating economic activity. On the other hand, stopping the reduction of the balance sheet means that the Fed will no longer reduce its assets and liabilities but will continue to hold or repurchase maturing bonds. When the Fed stops reducing the balance sheet, the level of reserves in the banking system will not decrease and may even increase significantly, which means that liquidity in the market becomes more abundant, and bank lending capacity will also increase significantly. Fed balance sheet reduction typically leads to expectations of high long-term interest rates because the supply of bonds in the market increases. However, stopping the reduction avoids the pressure of rising long-term interest rate expectations in the US, and the financial system will continue to support economic activity. Therefore, by directly buying bonds or announcing a halt to the reduction of the balance sheet, the Fed's monetary policy influence and expectation management mechanism are sufficient to significantly expand the liquidity of the financial system, lower long-term interest rates, boost prices of risk assets like stocks, and stimulate the economy through enhancing market confidence.