Not just a rate cut? Former New York Fed expert: Powell may announce $45 billion bond-buying program

As the December FOMC meeting approaches, market focus has shifted from rate cuts to the possibility of the Federal Reserve restarting large-scale bond purchases. A former New York Fed expert predicts that Powell will announce a plan to purchase $45 billion in Treasuries per month to prevent repo market rates from spiking.

(Prior context: US November ADP employment numbers slashed by 32,000, “far below expectations”! The probability of a Fed rate cut in December remains at 88.8%)

(Background supplement: 2026 Fed leadership transition: End of the Powell era, US interest rates may be “cut all the way down”)

As the December FOMC meeting draws near, market attention has shifted from the widely expected rate cut to the possibility that the Fed may soon announce a significant balance sheet expansion plan. Wall Street veteran strategists point out that the Fed could be about to reveal a major asset purchase program.

Recently, former New York Fed repo specialist and BofA rates strategist Mark Cabana predicted that, in addition to the widely expected 25 basis point rate cut, Fed Chair Powell will announce a plan next Wednesday to purchase $45 billion in Treasuries ((T-bills)) per month. This bond buying operation is expected to officially begin in January 2026, aiming to inject liquidity into the system and prevent further spikes in repo market rates.

Cabana warned in his report that while the rates market has reacted calmly to the prospect of rate cuts, investors are generally “underestimating” the Fed’s resolve regarding its balance sheet. He points out that current money market rates indicate that bank system reserves are no longer “ample,” and the Fed must restart bond purchases to fill the liquidity gap. Meanwhile, UBS’s trading division has made a similar forecast, believing the Fed will start buying around $40 billion in Treasuries per month from early 2026 to maintain stability in short-term rate markets.

This potential policy adjustment comes at a critical time, with the Fed’s leadership soon to change. As Powell’s term nears its end and expectations rise that Kevin Hassett may be appointed as the next Fed Chair, next week’s meeting will not only impact short-term liquidity but also set the tone for the coming year’s monetary policy path.

Former New York Fed expert’s forecast: $45 billion in monthly bond purchases

Although the market consensus is locked in on 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,” he notes that the Fed may announce an RMP (Reserve Management Purchase) program as large as $45 billion per month, far exceeding current market expectations.

Cabana breaks down this figure: the Fed needs to buy at least $20 billion per month to accommodate the natural growth of its liabilities, plus an additional $25 billion to reverse the reserve loss caused by previous “over-tightening.” He expects this level of bond purchases to last at least six months. The announcement is expected to be included in the Fed’s implementation notes, with detailed operational size and frequency published via the New York Fed’s website, focusing mainly on the Treasury market.

As previously reported by Wallstreetcn, since the Fed’s balance sheet peaked at nearly $9 trillion in 2022, its quantitative tightening (QT) policy has reduced it by about $2.4 trillion, effectively draining liquidity from the financial system. However, even though QT has stopped, signs of funding stress remain evident.

The clearest signal comes from the repo market. As the hub for short-term financing in the financial system, the repo market’s overnight reference rates—such as the Secured Overnight Financing Rate ((SOFR)) and the tri-party general collateral repo rate ((TGCR))—have recently and frequently breached the upper limit of the Fed’s policy rate corridor. This indicates that banking system reserves have shifted from being “ample” to “adequate,” and risk becoming “scarce.” Given the systemically important role of the repo market, this situation is considered unsustainable for the Fed, as it could weaken monetary policy transmission.

Against this backdrop, recent statements by Fed officials have also hinted at the urgency of action. New York Fed President John Williams has said, “We expect to reach ample reserves soon,” while Dallas Fed President Lorie Logan noted, “It will soon be appropriate to resume balance sheet growth.” Cabana interprets “soon” ((will not be long)) as referring to the December FOMC meeting.

Auxiliary tools to smooth year-end volatility

In addition to long-term bond buying plans, to address imminent year-end funding volatility, BofA expects the Fed to announce 1–2 week term repo operations ((term repo operations)). Cabana believes these operations will likely be priced at the Standing Repo Facility ((SRF)) rate or 5 basis points higher, aiming to reduce tail risks in the year-end funding market.

On managing rates, although some clients have asked whether the Fed will lower the Interest on Reserve Balances ((IOR)), Cabana believes simply reducing IOR “won’t solve anything,” as banks have generally sought higher cash buffers after the Silicon Valley Bank ((SVB)) collapse. He considers it more likely that both the IOR and SRF rates will be cut by 5 basis points simultaneously, but this is not the base case.

Another important backdrop for this meeting is the upcoming personnel changes at the Fed. The market currently sees Kevin Hassett as a strong contender for the next Fed Chair. Cabana points out that once the new chair is confirmed, the market will price the medium-term policy path more based on the new leader’s guidance.

UBS also agrees with the view of a return to balance sheet expansion. UBS’s sales and trading division notes that by buying Treasuries, the Fed can shorten its asset duration, better matching the average duration of the Treasury market. Whether this operation is called RMP or quantitative easing ((QE)), the ultimate goal is clear: to ensure smooth market functioning during a critical period of political and economic transition through direct liquidity injection.

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<Not just a rate cut? Former New York Fed expert: Powell may announce $45 billion bond purchase plan> was first published by BlockTempo, the most influential blockchain news media.