Analysts Warn Fed's Balance Sheet Shift Could Have 'Larger Impact' Than Interest Rates In The Near Future

The Federal Reserve's latest decision to pause its long-running balance sheet reduction may have a greater medium-term impact on financial markets than its current interest rate path, analysts have warned.

Stocks Seen Driven By AI Optimism In Near Term

The shift in liquidity could dampen sentiment, though a gradual recovery may follow as asset purchases resume in line with the banking system's growth, reported Investing.com, citing Wolfe Research analysts, Chris Senyek and Adam Calingasan.

“The Fed’s decision to end the reduction of Treasury Securities points to a changing liquidity picture in the months ahead, with reserves set to potentially shrink,” the analysts wrote in a Thursday note.

While reserve fluctuations are expected to have a “larger impact” on markets over the “intermediate term”, analysts noted that “the key question” is whether stocks will move based on liquidity concerns or sustained optimism around corporate artificial intelligence spending. “We believe the latter in the near term,” they added.

See Also: Tether Now Holds More US Debt Than South Korea, Germany: CEO Paolo Ardoino Says Stablecoin Issuer Will Soon Surpass Brazil With $200 Billion Target

Powell Rules Out December Rate Cut

The Fed’s decision to halt its balance sheet reduction comes after it cut its benchmark interest rate by 25 basis points to a target range of 3.75%-4.00% and announced a halt to the runoff of its security holdings starting in December. This move was widely anticipated and marked the end of the quantitative tightening program that began in mid-2022.

However, the Fed Chair Jerome Powell cautioned that another rate cut in December is “far from a foregone conclusion,” leading to a sharp repricing in December expectations.

Meanwhile, Sen. Elizabeth Warren (D-Mass.) has criticized the Trump administration for withholding key economic data, stating that the Federal Reserve was “flying blind” ahead of its interest rate decisions, adding another layer of uncertainty to the current economic landscape.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.