Federal Reserve Decision Outlook: More Important than Rate Cuts is the Signal of Balance Sheet Expansion

According to analysis reports from foreign media, the Federal Reserve officially ended its balance sheet reduction on December 1. As a result, bank reserves have fallen to historically low levels associated with financing stress, and the Secured Overnight Financing Rate (SOFR) has periodically tested the upper limit of the policy interest rate corridor. These developments indicate that the U.S. banking system is gradually entering a state of liquidity stress. In this context, the most important signal from the FOMC may not be a 25 basis point rate cut, but rather the direction of its balance sheet strategy.

The Federal Reserve is expected to clarify or outline through its implementation guidance how it intends to transition to a Reserve Management Purchase Program (RMP). According to Evercore ISI, this program could begin as early as January 2026, with approximately $35 billion per month allocated for the purchase of Treasury bills, resulting in an annual growth of the balance sheet exceeding $400 billion. (Jin Shi)