Former New York Fed expert: Powell may announce $45 billion bond purchase plan
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Former New York Fed expert: Powell may announce $45 billion bond purchase plan
This move could signal the resumption of balance sheet expansion, setting the tone for monetary policy next year as Powell's term nears its end and speculation over his successor intensifies.
Navigating Web3 tides with focused insightsAuthor: Zhang Yaqi
Source: Wall Street Horizon
As the Federal Reserve's December 10 monetary policy meeting approaches next week, markets are not only focused on the widely expected rate cut, but also on a potential major balance sheet expansion plan that senior Wall Street strategists suggest the Fed may soon announce.
Recently, Mark Cabana, Bank of America interest rate strategist and former New York Fed repo expert, predicted that in addition to the broadly anticipated 25-basis-point rate cut, Fed Chair Powell will announce a plan on Wednesday to purchase $45 billion in Treasury bills (T-bills) per month. This bond-buying operation is set to officially begin in January 2026, aiming to inject liquidity into the system and prevent repo market rates from rising further.
In his report, Cabana warned that while the interest rate market has reacted indifferently to rate cuts, investors have generally "underestimated" the scale of the Fed's actions regarding its balance sheet. He noted that current money market rate levels indicate bank system reserves are no longer "ample," and the Fed must restart asset purchases to fill the liquidity gap. At the same time, UBS's trading desk has issued a similar forecast, suggesting the Fed will begin purchasing approximately $40 billion in T-bills monthly starting in early 2026 to maintain stability in short-term interest rate markets.
This potential policy shift comes at a critical juncture as the Fed faces leadership transition. With Powell's term nearing its end and growing market speculation that Kevin Hassett could succeed him as Fed chair, next week’s meeting will not only impact short-term liquidity but also set the tone for monetary policy over the coming year.
Former New York Fed Expert Prediction: $45 Billion Monthly Bond Buys
Although market consensus has already priced in a 25-basis-point rate cut by the Fed next week, Mark Cabana believes the real variable lies in balance sheet policy. In his weekly report titled "Hasset-Backed Securities," he指出 that the size of the RMP (Reversal of Monetary Policy) the Fed will announce could reach as high as $45 billion per month—a figure far exceeding current market expectations.
Cabana detailed the composition of this number: the Fed will need to purchase at least $20 billion monthly to offset natural growth in its liabilities, plus an additional $25 billion to reverse reserve depletion caused by previous "excessive balance sheet reduction." He expects this pace of asset purchases to last at least six months. The announcement is expected to be included in the Fed's implementation statement and detailed operational scale and frequency will be published on the New York Fed website, with a primary focus on the Treasury bill market.
According to a previous article by Wall Street Horizon, since the Fed's balance sheet peaked at nearly $9 trillion in 2022, its quantitative tightening (QT) policy has reduced its size by about $2.4 trillion, effectively draining liquidity from the financial system. However, even though QT has stopped, signs of funding stress remain evident.
The clearest signal comes from the repo market. As the central hub for short-term financing in the financial system, key overnight reference rates such as the Secured Overnight Financing Rate (SOFR) and the Tri-Party General Collateral Repo Rate (TGCR) have frequently and sharply breached the upper bound of the Fed's policy rate corridor in recent months. This indicates that reserve levels within the banking system are sliding from previously "ample" to merely "sufficient," and face increasing risk of becoming "scarce." Given the systemic importance of the repo market, such conditions are considered intolerable for the Fed in the long run, as they could undermine the effectiveness of monetary policy transmission.
Against this backdrop, recent statements from Fed officials also hint at urgency. New York Fed President John Williams stated, “We expect it won’t be long before we reach ample reserve levels,” while Dallas Fed President Lorie Logan noted, “I expect it will soon be appropriate to resume balance sheet growth.” Cabana interprets “not long” as referring directly to the December FOMC meeting.
A Tool Aimed at Smoothing Year-End Volatility
Besides the long-term bond purchase program, to address upcoming year-end funding volatility, BofA expects the Fed will also announce term repo operations lasting 1–2 weeks. Cabana believes these operations will likely be priced at or slightly above the Standing Repo Facility (SRF) rate by 5 basis points, aimed at reducing tail risks in year-end funding markets.
Regarding interest rate management, although some clients have asked whether the Interest on Reserve Balances (IORB) might be lowered, Cabana argues that simply cutting IORB would “solve nothing,” as banks have generally preferred to hold higher cash buffers since the collapse of Silicon Valley Bank (SVB). He believes it is more likely—though not the base case—that both IORB and SRF rates could be cut by 5 basis points simultaneously.
Another important context for this meeting is the personnel changes looming at the Fed. Kevin Hassett is currently viewed by markets as a strong contender for the next Fed chair. Cabana notes that once a new chair is confirmed, the market will increasingly price in medium-term policy paths based on the incoming chair’s guidance.
UBS also supports the view that balance sheet expansion is returning. UBS’s sales and trading team pointed out that by purchasing Treasury bills, the Fed can shorten its asset duration to better match the average duration of the Treasury market. Whether this operation is called RMP or quantitative easing (QE), its ultimate goal is clear: through direct liquidity injections, ensure financial markets remain stable during a critical period of political and economic transition.
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