Federal Reserve Meeting This Week: Rate Cuts Are Just a Decoy, the Balance Sheet Is the Real Game

Last Friday, US stocks approached historic highs, with the market betting that the Federal Reserve will continue to cut interest rates. But to be honest, what’s truly worth watching this time might not be the interest rates themselves—but rather how the Fed plans to handle its massive balance sheet.

After quietly stopping quantitative tightening, what’s the next move? Will they inject liquidity into the market? That’s the real key to whether the bull market can continue.

Last week, Bank of America’s rate strategy team made a prediction: they think the Fed might announce as early as this week that starting in January next year, it will purchase $45 billion in short-term Treasury bills (those with maturities under one year) each month, under the guise of “reserve management operations.”

However, not everyone thinks there’s such urgency. Roger Hallam, Global Head of Rates at Vanguard, estimates that action may not be taken until late Q1 or early Q2 next year, and the scale will be more conservative—about $15-20 billion per month. Their logic is that the market is still relatively stable, so the Fed doesn’t need to be too aggressive.

PineBridge expects another 25 basis point cut on December 10, bringing the policy rate to the 3.5%-3.75% range. This would bring rates closer to the so-called “neutral rate”—around 3%—which is the sweet spot where the economy is neither overheating nor stalling.

In short, rate cuts may just be the appetizer; how the balance sheet is managed is the main course.