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As expected, the Federal Open Market Committee cut the fed funds rate yesterday from 4.0% to 3.75%, taking it back to the lowest level since October 2022. The market can take some comfort from the fact that only two members argued against any cut at all – there is, for now, still a broad consensus around the easing path.

The official statement kept the description of inflation as “somewhat elevated,” and the overall tone remained on the cautious side, but Chair Jerome Powell avoided any new alarmist language in his press conference, even though inflation is once again a hot political topic. The updated dot plot points to lower expected price increases over the next three years and assumes a return to the 2% target by 2028. So far, so good.

What we find more noteworthy at ECP is the decision on the balance sheet. The FOMC indicated that it will start buying bonds again next year, beginning with about USD 40 billion already next month, framing this as a technical measure to keep money markets functioning smoothly. Our graph today shows how the Fed’s balance sheet, which exploded after the Global Financial Crisis under “Helicopter Ben”, remains vastly larger than it was before 2008, even after a period of quantitative tightening.

Since the GFC, large-scale bond purchases have become a key policy instrument to keep yields under control. But QE is not a free lunch: if pushed too far, it can contribute to overheating in asset prices and, over time, to a gradual debasement of the US dollar. The line between “technical operations” and a renewed round of QE is thin.

Stay alert.