🔥 Don’t focus only on rate cuts! The U.S. Federal Reserve may take a much more important “big step.”
Tonight’s Federal Reserve decision is not just about a possible rate cut. There is another key signal that could shake markets — and it may be even more important than changes in interest rates.
The Fed officially ended balance sheet contraction (QT) on December 1. Bank reserves in the financial system have fallen to levels historically associated with tightening conditions. As a result, the overnight funding rate (SOFR) has tested the upper bound of the policy rate range multiple times, signaling that liquidity in the financial system is starting to tighten.
The real focus: a new direction for the balance sheet
$pipo
The most important signal from tonight’s FOMC meeting may not be the widely expected 25 basis point rate cut, but instead a clear shift in balance sheet strategy. Markets are watching closely to see whether the Fed will officially outline a transition — via its Implementation Guidance — toward a Reserve Management Purchase (RMP) framework.
Simply put, this means a move from “contraction” to “modest expansion.” Institutions estimate this plan could begin as early as January 2026.
There is still disagreement over the exact scale, but the consensus is that expansion is coming:
One group of analysts expects the Fed to buy around $35 billion per month in short-term Treasury securities, implying more than $400 billion in annual balance sheet growth.
More aggressive forecasts — including those from Bank of America and former New York Fed officials — suggest purchases may need to reach $45 billion per month to meaningfully rebuild bank reserves.
