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

As the Federal Reserve's interest rate decision meeting on December 10 approaches next week, the market is not only focusing on the imminent interest rate cut measures, but also on a possible major expansion of the Fed's balance sheet, according to senior strategists on Wall Street. Recently, former New York Fed repo expert and Bank of America rate strategist Mark Cabana predicted that in addition to the widely expected 25 basis point rate cut, Fed Chair Powell will announce a plan to purchase $450 billion worth of Treasury bills on a monthly basis starting in January 2026. This bond purchasing operation is aimed at injecting liquidity into the system to prevent further spikes in repo market rates. Cabana warned in his report that although the interest rate market has had a muted response to the rate cut, investors are generally underestimating the Fed's actions on its balance sheet. He pointed out that current money market interest rate levels indicate that bank reserves are no longer "abundant" and the Fed must fill the liquidity gap by restarting bond purchases. Meanwhile, the trading department at UBS has also made a similar prediction, suggesting that the Fed will start purchasing around $400 billion worth of Treasury bills monthly starting in early 2026 to maintain stability in short-term interest rate markets. This potential policy adjustment comes at a critical time as the Fed's leadership is nearing a transition. With Chair Powell's term coming to an end and market expectations rising for Kevin Hassett to potentially take over as Fed Chair, next week's meeting not only concerns short-term liquidity but also sets the tone for the monetary policy path in the coming year. Former New York Fed expert predicts: Monthly $450 billion bond purchases Although the market consensus is locked in on a 25 basis point rate cut by the Fed next week, Mark Cabana believes the real variable lies in balance sheet policy. In his report titled "Hasset-Backed Securities," he pointed out that the Fed may announce an RMP scale as high as $450 billion per month, a prediction significantly exceeding current market expectations. Cabana detailed the breakdown of this figure: the Fed will need to purchase at least $200 billion monthly to address the natural growth of its liabilities, in addition to an additional $250 billion to reverse the reserve drain caused by the previous "excessive tightening." He expects this level of bond purchasing to continue for at least 6 months. This statement is expected to be included in the Fed's operational instructions and detailed scale and frequency announcements will be published on the New York Fed website, with a focus on the Treasury bill market. According to previous reports by Wall Street News, since reaching a peak of nearly $9 trillion in 2022, the Fed's tightening policy has reduced its balance sheet by about $2.4 trillion, effectively draining liquidity from the financial system. However, even though QT has been stopped, signs of funding stress are still evident. The clearest signal comes from the repo market. As the short-term financing hub of the financial system, overnight reference rates in the repo market such as the Secured Overnight Financing Rate (SOFR) and the Tri-party General Collateral Rate (TGCR) have frequently and significantly exceeded the upper limit of the Fed's policy rate corridor in recent months. This indicates that reserves within the banking system are shifting from "adequate" to "sufficient," and there is a risk of further moving towards "scarce." Given the systemic importance of the repo market, this situation is considered unsustainable by the Fed, as it could weaken the efficiency of monetary policy transmission. In this context, recent remarks by Fed officials also suggest the urgency of action. New York Fed President John Williams has stated that "we expect to reach adequate reserve levels soon," while Dallas Fed President Lorie Logan has indicated that it is appropriate to resume balance sheet growth soon. Cabana interprets that "soon" implies the FOMC meeting in December. Assistance tools aimed at smoothing year-end fluctuations In addition to the long-term bond purchasing plan, to address the upcoming year-end funding market fluctuations, Bank of America expects the Fed to announce term repo operations lasting 1-2 weeks. Cabana believes the pricing of these operations may be set at the level of the Standing Repo Facility (SRF) rate or 5 basis points above, aimed at reducing tail risks in the year-end funding market. Regarding managing interest rates, although there have been inquiries about whether the interest on excess reserves (IOR) will be lowered, Cabana believes that simply lowering IOR "won't solve any problems" because banks have generally been more inclined to hold higher cash buffers after the collapse of Silicon Valley Bank (SVB). He believes it is more likely that IOR and SRF rates will be synchronously lowered by 5 basis points, but this is not the base case scenario. Another important background for this meeting is the upcoming personnel changes at the Fed. Currently, the market views Kevin Hassett as a strong contender for the next Fed Chair. Cabana points out that once the new Chair is determined, the market will price the mid-term policy path more based on guidance from the new Chair. UBS also agrees with the view of a return to balance sheet expansion. The sales and trading department at UBS pointed out that by purchasing Treasury bills, the Fed can reduce asset duration and better match the average duration of the bond market. Whether this operation is called RMP or quantitative easing (QE), the ultimate goal is clear: to inject liquidity directly to ensure stable operation of financial markets during key political and economic transitions. This article is reproduced from Wall Street News; Author: Zhang Yaqi; GMTEight Editor: Chen Xiaoyi.