The Fed’s balance sheet takes center stage as liquidity concerns rise

The U.S. Federal Reserve is widely expected to cut interest rates when it meets on Wednesday with little to no room for a surprise. Any remaining excitement is centered on what the central bank will signal regarding its balance sheet and the path forward. Short-term interest rates have been particularly volatile in recent weeks, with the U.S. repo market signaling potential liquidity distress as it trades within a few basis points of the Fed's upper limit, and in fact was above the top of the range Monday. The repo market is considered the plumbing of the U.S. financial system as it is the place where banks go for the overnight loans they use to fund operations. The rise in funding rates has raised questions over the state of bank reserves and led a number of analysts to bet on the Fed end