The real focus of next week's Federal Reserve meeting is not about cutting interest rates at all. A 25 basis point cut? That's just fireworks for the spectators. The real rocket launch is that the balance sheet will be reopened for liquidity.
Former New York Fed expert Mark Cabana has burst the bubble. He predicts that the Federal Reserve will announce starting in January next year, they will inject $45 billion each month to buy Treasury bonds. This is no small matter; it's directly pumping money into the financial system. They've given this operation a low-key name called 'Reserve Management Purchases' (RMP), simply put, they don't want to be criticized and are afraid to mention the term quantitative easing (QE) again.
Why have repo market rates been rising recently? Because the reserves in the banking system have run low. The pipes are almost dry, and everyone needs to scramble for short-term funding, which naturally drives up costs. This scene happened once in 2019, resulting in a liquidity crisis. The folks at the Fed are very clear in their minds; their three years of quantitative tightening (QT) have drained too much blood from the market, and now they need to inject some back.
So don’t be fooled by the jargon of 'technical adjustments.' This is balance sheet expansion. This is liquidity injection. $45 billion a month, lasting at least six months, is much fiercer than Citigroup's prediction of $20 billion. They will also handle term repo operations simultaneously, acting directly as temporary firefighters.
The timing is also interesting. Powell is a caretaker chair, and his term is about to end; Trump might want Hassett to take over. Letting the liquidity out now essentially sets the tone for the next person. If the new chair wants to do something significant, they need to have some bullets in hand.
The market has become numb to interest rate cuts. A slight dip from the peak in rates doesn't change the tightness of funding. But balance sheet expansion is a different matter. Once the faucet is turned on, the first to overflow will definitely be those assets that are short on liquidity. U.S. Treasuries will gain value, gold will shine, and the dollar may weaken.
Remember, keep an eye on whether Powell mentions the term 'RMP' next week. Interest rate cuts are old news; the bond purchase plan is the headline. Liquidity is king; everything else is accompaniment.
