Former New York Fed Expert: Powell May Announce $45 Billion Bond Purchase Plan

Written by: Zhang Yaqi

Source: Wallstreetcn

As the December 10 FOMC meeting approaches next week, the market is not only focused on the much-anticipated rate cut; seasoned Wall Street strategists point out that the Federal Reserve may soon announce a significant balance sheet expansion plan.

Recently, former New York Fed repo expert and Bank of America rates strategist Mark Cabana predicted that, in addition to the widely expected 25 basis point rate cut, Fed Chair Jerome Powell will announce a plan next Wednesday to purchase $45 billion of Treasury bills (T-bills) per month. This asset purchase operation is set to be officially implemented in January 2026, aiming to inject liquidity into the system and prevent repo market rates from surging further.

In his report, Cabana warned that although the rates market has reacted mildly to the expected rate cut, investors are generally “underestimating” the Fed’s actions on the balance sheet front. He pointed out that the current level of money market rates indicates that bank system reserves are no longer “ample,” and the Fed must restart asset purchases to fill the liquidity gap. Meanwhile, UBS trading desk gave a similar forecast, expecting the Fed to begin buying about $40 billion of T-bills monthly in early 2026 to maintain stability in the short-term rates market.

This potential policy adjustment comes at a crucial time as the Fed’s leadership is about to change. With Powell’s term nearing an end and market expectations rising for Kevin Hassett to potentially succeed him as Fed Chair, next week’s meeting concerns not only short-term liquidity, but will also set the tone for the monetary policy path in the coming year.

Former New York Fed Expert Predicts $45 Billion Monthly Asset Purchases

Although market consensus has locked 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 “Hassett-Backed Securities,” Cabana pointed out that the scale of the RMP to be announced by the Fed could reach as high as $45 billion per month, far exceeding current market expectations.

Cabana broke down the figure in detail: the Fed needs to purchase at least $20 billion monthly to accommodate the natural growth of its liabilities, plus an additional $25 billion to reverse reserve losses caused by previous “over-tightening” of the balance sheet. He expects asset purchases of this scale will last at least six months. This announcement is expected to be included in the Fed’s implementation notes and detailed information about the operation’s size and frequency will be published on the New York Fed’s website, with purchases focused on the T-bill market.

According to a previous Wallstreetcn article, since the Fed’s balance sheet peaked near $9 trillion in 2022, its quantitative tightening policy has reduced it by about $2.4 trillion, effectively draining liquidity from the financial system. However, even with QT having stopped, signs of funding stress remain evident.

The clearest signal comes from the repo market. As the short-term funding hub of the financial system, overnight repo rates—such as the Secured Overnight Financing Rate (SOFR) and tri-party General Collateral Repo Rate (TGCR)—have repeatedly and sharply breached the upper bound of the Fed’s policy rate corridor in recent months. This signals that the level of reserves in the banking system has shifted from “ample” to merely “sufficient,” with the risk of further moving toward “scarce.” Given the systemic importance of the repo market, this situation is seen as something the Fed cannot tolerate for long, as it could impair the effectiveness of monetary policy transmission.

Against this backdrop, recent statements from Fed officials have hinted at the urgency for action. New York Fed President John Williams said, “We expect to reach ample reserve levels soon,” and Dallas Fed President Lorie Logan also noted, “It will be appropriate to resume balance sheet growth soon.” Cabana interprets “soon” as referring to the December FOMC meeting.

Auxiliary Tools to Smooth Year-End Volatility

In addition to the long-term asset purchase plan, to cope with upcoming year-end funding volatility, Bank of America expects the Fed to announce term repo operations lasting 1-2 weeks. Cabana believes the pricing for these operations may be set at or 5 basis points above the Standing Repo Facility (SRF) rate, aiming to reduce tail risks in year-end funding markets.

On rate management, although some clients have asked whether the interest on reserve balances (IOR) will be lowered, Cabana believes that simply lowering IOR “won’t solve anything,” as banks have generally preferred higher cash buffers since the collapse of Silicon Valley Bank (SVB). He thinks a more likely scenario would be a simultaneous 5 basis point reduction in both IOR and SRF rates, but this is not the base case.

Another important backdrop for this meeting is the Fed’s impending personnel change. The market currently sees Kevin Hassett as a strong contender for the next Fed Chair. Cabana points out that once a new chair is designated, the market will focus more on the new leader’s guidance when pricing the medium-term policy path.

UBS also agrees with the view that balance sheet expansion is returning. The UBS sales and trading team pointed out that by buying T-bills, the Fed can shorten the duration of its assets, better matching the average duration of the Treasury market. Whether this is called RMP or quantitative easing (QE), the ultimate goal is clear: through direct liquidity injection, ensure that financial markets can maintain smooth operations during a key period of political and economic transition.