Perhaps next week, the term "RMP" will go viral across the market and be regarded as the "new generation of QE."

The era of "quantitative tightening" (QT) for the Federal Reserve's balance sheet has come to an end, and a new phase aimed at expanding the balance sheet may soon begin. The market is holding its breath for a new acronym—RMP (Reserve Management Purchases). Although Federal Reserve officials emphasize its essential difference from quantitative easing (QE), this does not seem to prevent investors from viewing it as a "new generation of QE."

With the Federal Reserve officially halting the reduction of its balance sheet this Monday, Wall Street's attention quickly turned to the next steps. Due to ongoing turmoil in the U.S. money market, particularly concerning the unsettling fluctuations in the $12 trillion repurchase market rates, analysts generally believe that the Federal Reserve may announce the initiation of "Reserve Management Purchases" (RMP) aimed at increasing system liquidity as early as next week's monetary policy meeting.

According to predictions from Evercore ISI analysts Marco Casiraghi and Krishna Guha, the Federal Reserve may announce plans to purchase $35 billion in short-term Treasury bills (T-bills) each month starting in January next year. Considering that approximately $15 billion in mortgage-backed securities (MBS) will mature each month, this move would result in a net monthly growth of about $20 billion in the Federal Reserve's balance sheet.

This potential policy shift marks a transition in the Federal Reserve's liquidity management strategy from "draining" to "injecting," aimed at ensuring that the financial system has sufficient reserves for smooth operation. For investors, the timing, scale, and specific operational methods of the RMP announcement will become key clues for assessing the future market liquidity environment and interest rate trends.

Farewell to "Balance Sheet Reduction": Why a New Round of Balance Sheet Expansion is Needed?

Since the balance sheet peaked at nearly $9 trillion in 2022, the Federal Reserve's quantitative tightening policy has reduced its size by about $2.4 trillion, effectively draining liquidity from the financial system. However, even with QT halted, signs of funding stress remain evident.

The clearest signal comes from the repurchase market. As the short-term financing hub of the financial system, the overnight reference rates in the repurchase market, such as the Secured Overnight Financing Rate (SOFR) and the Tri-Party General Collateral Repo Rate (TGCR), have frequently and dramatically breached the upper limit of the Federal Reserve's policy rate corridor in recent months.

This indicates that the level of reserves within the banking system is sliding from "ample" to "adequate," with the risk of further moving towards "scarce." Given the systemic importance of the repurchase market, this situation is considered difficult for the Federal Reserve to tolerate in the long term, as it may undermine the transmission efficiency of monetary policy.

RMP vs QE: Technical Operation or Policy Shift?

As the term RMP enters public discourse, the market will inevitably compare it to QE. Although both involve the Federal Reserve purchasing assets, there are significant differences in intent, tools, and impact.

First, the primary goal of QE is to lower long-term interest rates by purchasing long-term Treasury bonds and MBS to stimulate economic growth. In contrast, the purpose of RMP is more technical—ensuring that there is sufficient liquidity in the "pipeline" of the financial system to prevent unexpected events. Therefore, RMP will focus on purchasing short-term Treasury bills (T-bills), and its overall impact on market interest rates should be more neutralJohn Williams, President of the New York Federal Reserve, emphasized a month ago:

"Such reserve management purchases will be the natural next phase of the Federal Open Market Committee (FOMC) implementation of the ample reserves strategy and do not represent a change in the potential stance of monetary policy."

Despite the clear official intent, for a market accustomed to QE logic, any form of balance sheet expansion may be interpreted as a dovish signal.

Wall Street Expectations: When to Start and How Big?

Regarding the timing and scale of the RMP, Wall Street investment banks have provided specific forecasts, although there are differences in details.

• Evercore ISI expects the Federal Reserve to announce it at next week's meeting and to start purchasing $35 billion in short-term Treasury bonds monthly beginning in January. The firm also believes the Fed may need to make an additional one-time purchase of $100 billion to $150 billion in short-term Treasury bonds in the first quarter to quickly replenish reserves.
• Bank of America strategist Mark Cabana also believes the RMP could start on January 1 and emphasizes that the purchase scale is a key signal. He points out that if the monthly purchase scale exceeds $40 billion, it will have a positive impact on market spreads; if it is below $30 billion, it may be seen as bearish.
• Goldman Sachs' forecast is similar to Evercore ISI's net growth scale, expecting a monthly net purchase of about $20 billion.
• JP Morgan has a slightly different view, with analysts Phoebe White and Molly Herckis predicting in their 2026 outlook that the RMP will start in January 2026 and will be smaller in scale, about $8 billion per month.

In addition to starting the RMP, the Federal Reserve is not without other tools. The Standing Repo Facility (SRF) was originally established as a backup tool to address such situations, but due to the "stigmatization" issue, its effectiveness in stabilizing recent interest rate spikes has not been ideal.

According to JP Morgan analysis, the Federal Reserve could consider adjusting the SRF, such as changing it to continuous quoting rather than two auctions per day, or lowering its interest rate to encourage more institutions to use it. However, the ultimate solution may still rely on balance sheet expansion.

In the short term, considering the stubborn volatility in the repo market, some analysts suggest that to avoid severe funding tightness at year-end, the Federal Reserve may even take some "temporary open market operations" to smooth the market before officially announcing the RMP. Regardless, next week's Federal Reserve meeting will undoubtedly provide key guidance on how the market will bid farewell to QT and welcome RMP