The headline from the Fed’s last policy meeting was the widely anticipated interest-rate cut. But a more consequential detail for markets may have received less attention: the central bank’s decision to begin “reserve management purchases” — essentially, expanding its balance sheet by buying short-term US Treasurys.
Many investors focus on rate moves and guidance for the path of monetary policy. Balance-sheet shifts, however, can be just as influential. The Fed’s bond-buying programs have historically helped shape interest-rate conditions and, crucially, keep financial markets well supplied with liquidity.
That’s why the new purchase plan stood out to Steven Blitz, a managing director and chief US economist at TS Lombard, who argued it was one of the meeting’s most market-relevant signals.
“The Fed cut and said ‘that’s all folks’ until the data roll in, but that was no surprise and far less important than the signalling from the return of balance sheet purchases,” Blitz wrote.
Here’s what the program is — and why investors are paying attention.
What are reserve management purchases?
In its statement last Wednesday, the FOMC said it believed reserve balances had fallen to “ample levels,” and that it would begin purchasing short-term US Treasurys “on an ongoing basis” starting at the end of the week.
The Fed is set to buy roughly $40 billion of Treasurys per month, then taper those purchases in the spring. Reserve balances fell to around $2.8 trillion in October, the lowest level in nearly three years.
This program is not the same as quantitative easing (QE), which is designed to stimulate economic activity. Reserve management purchases, by contrast, are framed as a market-functioning tool — aimed at keeping the financial system stable by ensuring sufficient liquidity.
Why it matters to markets
Funding relief
When bank reserves are low, short-term funding markets can face more stress. In that sense, the RMP program is a technical operation rather than a shift in the Fed’s broader policy stance — but it can still move markets.
Conditions for short-term borrowing eased last week for banks, brokers, and other participants. The Secured Overnight Financing Rate fell from 3.9% last Wednesday to 3.67% by the end of the week, the lowest level in about three years, according to New York Fed data.
Some commentators interpret the move as a warning sign for the banking system. Michael Burry — known for “The Big Short” — suggested that the need for liquidity support reflects fragility.
“I would add if the US banking system can’t function without $3+ trillion in reserves/life support from the Fed, that is not a sign of strength but a sign of fragility,” Burry wrote in a post on X Wednesday evening. “So I’d say US Banks are getting weaker way too fast.”
Others see it as a normal and necessary function of the Fed as the economy grows and reserve demand rises.
“Moderate balance sheet expansion will be necessary to accommodate the increased demand for reserves that accompanies ongoing economic growth,” strategists at Glenmede wrote in a recent note.
Implications for stocks and bonds
Deutsche Bank noted that RMPs mark the first time the Fed has meaningfully expanded its balance sheet since it ended QE in 2022.
“The 25bp cut is mostly in line with expectations, but the start of treasury purchasing ($40bn) is what drove the market reaction,” JPMorgan analysts wrote in a note after the meeting, pointing to the rise in stocks.
Morgan Stanley made a similar point, arguing that even if the Fed insists RMPs are not QE, the liquidity effect can look similar in practice.
“More importantly, these purchases provide additional liquidity for markets, and in combination with rate cuts, also suggest the Fed is likely less worried about missing its inflation target,” the bank wrote on Monday.
Bank of America said the “QE-like” impact could also pull down longer-term yields. In its baseline scenario — which includes around $380 billion in reserve management purchases in 2026 — strategists expect the 10-year US Treasury yield to fall by 20 to 30 basis points.
That could be supportive for equities in two ways: lower yields can make stocks more attractive relative to bonds, and a lower 10-year yield can translate into easier borrowing conditions for households and businesses.
“Fed’s RMP program will increase general market liquidity,” BofA strategists wrote in a separate note last week. “With the Fed action, the market is on better footing and the large calendar to end the year should be bought.”
