The biggest focus of the Fed this week: It's not about rate cuts, but whether it will inject new liquidity into the market.

On December 8, despite the market seemingly pricing in another Federal Reserve rate cut as a certainty and pushing U.S. stocks close to all-time highs last Friday, the outcome of this week’s Fed policy meeting may reveal that the true driving force behind the bull market in stocks and other risk assets is not interest rates. After quietly halting quantitative tightening, the key will be how the Fed manages its massive balance sheet and whether it injects new liquidity into the market. Bank of America’s global rates strategy team stated last Friday that they expect the Fed to announce this week that, starting in January, it will purchase $45 billion per month in Treasury bills with maturities of one year or less, as part of “reserve management operations.” Others believe this may take more time and that the Fed does not need to take excessive action to keep markets running smoothly. Roger Hallam, global head of rates at Vanguard’s Fixed Income Group, expects the Fed to begin buying Treasuries at a pace of $15–20 billion per month by the end of the first quarter or early second quarter next year. Kelly from PineBridge expects the Fed to cut rates by another 25 basis points on December 10, bringing the policy rate down to a range of 3.5%–3.75%, one step closer to the historical neutral rate of around 3% that is aimed at maintaining stable economic operations. (Jin10)