The Federal Reserve is about to restart "expanding the balance sheet", possibly announcing it as early as December?

In view of the strong signal released by the Federal Reserve officials that the central bank is not far from restarting the expansion of its balance sheet, Citigroup predicts that the Federal Reserve may announce as early as December and implement a new round of Treasury purchase plan in January. Clear signal released by Federal Reserve officials New York Fed President John Williams gave a speech this week, hinting that the Federal Reserve will soon start expanding its balance sheet to ease funding market pressures. Williams stated: Based on recent ongoing repo market pressures and other signs of reserves moving from abundant to plentiful, I expect we are not far from reaching a level of plentiful reserves. This week, the New York Fed held an ad hoc meeting with major Wall Street banks, with the core topic being to solicit feedback from primary dealers (banks underwriting government debt) on the use of the Fed's standing repo facility. This highlights officials' concerns about the tense situation in the US monetary market. Key indicators of short-term borrowing costs continue to send warning signals. Tri-party repo rates rose again this week, at one point nearly 0.1 percentage points higher than the Fed's interest on excess reserves rate. Roberto Perli, head of market operations at the New York Fed, acknowledged that some borrowers have been struggling to obtain repo funding close to the central bank's interest on excess reserves rate, and the volume of repo transactions done at rates higher than the interest on excess reserves rate has reached the highest levels since the end of 2018 and early 2019. Analysts warn that as the end of the year approaches, the market will face more pressure. Banks typically reduce the size of their balance sheets at the year-end for financial reporting purposes, which could exacerbate the cash shortage. After three years of quantitative tightening, excess reserves in the banking system have significantly decreased. Balance sheet reduction to stop in December, debt purchases to start in January Citigroup currently expects the Federal Reserve's balance sheet to stop shrinking on December 1st. The most likely path is for the Fed to announce more Treasury purchases at its January meeting, effective from February 1st. However, the probability of announcing debt purchases at the December meeting is similar to that in January. Repo market pressures have eased since the end of October, and the Secured Overnight Financing Rate (SOFR) has not exceeded 4% (the upper limit of the federal funds target range) in the past few days. However, pressure could rise again in the coming weeks, increasing the urgency of an announcement in December. Citigroup also predicts that the Federal Reserve is most likely to lower the interest on reserves rate (IORB) by 5 basis points at the December meeting, which will help to keep repo rates within the federal funds target range. Net purchases of $20 billion per month to maintain liquidity Analysts believe that the Federal Reserve only needs to conduct relatively moderate net purchases of Treasury securities to keep reserves in the ample range. Assuming current reserve levels grow by approximately 5% per year (to maintain the ratio of reserves to nominal GDP roughly constant) and circulating currency grows by about 5% per year, this means that SOMA needs to grow by approximately $20 billion per month net. Specifically, this means that the Federal Reserve will reinvest all maturing Treasury securities and additionally purchase about $20 billion in Treasury securities to offset the decrease in assets caused by maturing Mortgage-Backed Securities (MBS). Citigroup believes that this purchase size is sufficient to keep the SOFR (and the Tri-Party General Collateral Rate, TGCR) within the target range on normal trading days next year. Balance sheet size forecast: $7 trillion by the end of 2027 Citigroup's estimates suggest that the total assets on the Federal Reserve's balance sheet will steadily increase from $6.628 trillion in November 2025 to $7.068 trillion in December 2027. US Treasury holdings will increase from the current $4.192 trillion to $5.022 trillion, while MBS holdings will gradually decrease from $2.067 trillion to $1.682 trillion. On the liability side, the size of reserves is expected to fluctuate and rise from the current $2.887 trillion to $3.350 trillion by the end of 2027. Circulating currency will steadily increase from $2.423 trillion to $2.548 trillion. It is worth noting that the Reverse Repurchase Agreements (RRP) balances are expected to remain at very low levels. This growth path of the balance sheet reflects the Federal Reserve's shift from quantitative tightening to an "organic growth" mode. However, Citigroup emphasizes that this does not mean a change in monetary policy stance, but merely a technical adjustment to accommodate the growing demand for Fed liabilities. This article is reprinted from "Wall Street News," authored by Xu Chao; GMTEight edited by Feng Qiuyi.