"The Fed/Treasury Merger Is Underway": The Market Will Never Again Signal That The Government Is Spending Too Much

The big shock in last week's FOMC was not that the Fed would cut - after John Wiliams' Nov 20th speech, that was common knowledge. The shock is that the Fed launched QE Lite (aka reserve management purchases), just as we said they would simply by following the clogs in the repo plumbing, yet virtually nobody else echoed our expectation (we were right). What is just as remarkable is that the Fed was expected to start growing its balance sheet some time in late Q1/early Q2 2026, but certainly not this Friday.

The Fed's cover story, as TS Lombard's Steven Blitz notes, is that the TGA account swells in April, so they need to start buying bills now ($40bn in Jan, more in Feb). As we noted yesterday, BofA's rates guru - who was the only other voice to call for an early start to QE lite - predicted that $40bn is just the start, and it is likely that the Fed will end up buying much more (and veer outside of pure Bill territory, adding 2Y and 3Y notes as well). Here is Cabana's full forecast: