On December 10, the Federal Open Market Committee (FOMC) lowered the base rate by 25 basis points to a target range of 3.5–3.75%. The move was priced in, but the regulator surprised the market with a pivot in balance sheet management. The Fed is done draining liquidity and has started pumping it back into the system.
Liquidity Returns
The central bank kicks off reserve management purchases this week. The plan involves buying $40 billion in Treasury bills monthly.
The Fed argues that bank reserve balances have hit an acceptable floor and cannot drop further. To keep the banking plumbing intact, the regulator will support the supply of reserves by purchasing short-term paper. The market reads this clearly: fresh capital is entering the game, which historically acts as rocket fuel for risk assets.
WSJ chief economics correspondent Nick Timiraos confirms the shift: the focus is now on market mechanics and saturating the system with cash.
Split Committee
Unity among officials has cracked. Three out of 12 voters dissented against the decision, a rare occurrence for the central bank.
Chicago Fed President Austan D. Goolsbee and Kansas City Fed President Jeffrey R. Schmid voted to hold rates steady, citing inflation risks. On the other end of the spectrum, Governor Stephen I. Miran pushed for a more aggressive 50 basis point cut.
This divergence highlights deep uncertainty within the Fed. The updated Dot Plot shows that six of the 19 participants saw no need to cut rates at this stage at all.
Macro Background
The rhetoric in the final statement tightened. The regulator acknowledged that inflation is creeping up again and remains elevated. Job growth slowed, though unemployment stays low.
A key shift: The text dropped the language about reducing the balance sheet and replaced it with instructions for bill buying. Officials avoid the term QE (quantitative easing), but the result is what matters to the market — the era of liquidity withdrawal is officially over, and the printing press is back in business.
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