🔥 This week's Federal Reserve meeting, the real big news is not the interest rate cut, but rather — the balance sheet may be heading towards expansion again.
With the official end of balance sheet reduction on December 1, the Federal Reserve has rolled over maturing bonds into short-term Treasury bills, but the effect has not been ideal: repo rates have repeatedly broken through the target range, and banks are heavily relying on the standing repo facility. This indicates a key fact:
👉 Bank reserves are approaching the lower limit of the 'adequate' range, and system funds are starting to tighten.
In this situation, even though the Federal Reserve still holds nearly $6 trillion in bonds, it may still be forced to re-enter the bond purchasing market. U.S. Bank expects the Federal Reserve to announce a monthly 'reserve management purchasing' plan of about $45 billion this week to stabilize the market.
But what is more concerning is — the future direction of the balance sheet, which shows clear internal divisions.
Dallas Fed President Logan supports a more flexible approach to balance sheet expansion, even advocating for the future use of the 'repo rate' to replace the 'federal funds rate' as a policy anchor.
On the other hand, **Trump confidant Miran** believes the root problem lies in overly strict regulations, advocating for easing capital rules so that banks can hold Treasuries without additional capital, thereby reducing the reserves needed by the system. This line of thought aligns with the Trump team's direction of 'maximizing market forces.'
Currently, the Federal Reserve is advancing some regulatory easing, expecting to release $2.1 trillion in Treasury holding capacity, which will help alleviate repo pressure. But this also brings risks: bank leverage may rise, and the financial system will rely more on self-regulation by the market.
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🔥 Summary: This meeting is not just a simple interest rate cut, but a turning point for the monetary system.
• Repo market pressure → pushes for balance sheet expansion
• Internal conflicts within the Federal Reserve → significant policy framework adjustments may occur next year
• New chair takes office → the future of the Federal Reserve's balance sheet is full of uncertainties
📌 The market thinks that balance sheet expansion is inevitable, but the real future is far more complex than expected.
