Over the past month, we’ve talked about some pro-liquidity clues dropped by the FOMC Vice Chair, John Williams. 

In early November, he signaled to markets that the Fed would be prepared to expand the balance sheet again to avert any 2019-like liquidity shock.

Remember, in this 2019 analogue, the Fed made three consecutive quarter point rate cuts, and returned to expanding the balance sheet to respond to “strains in the money markets” (i.e. tightening liquidity conditions). 

Stocks did this …

   

As the former Fed Chair, Ben Bernanke once said, QE tends to make stocks go up.

Fast forward to today, and the Fed just made a third consecutive quarter point cut.  And right on cue, they returned to expanding the balance sheet again — to the tune of $40 billion a month (a “big” amount, in Powell’s own words).

Just like in 2019, the Fed is playing the semantics game — the asset purchases are “not QE” but “reserve management.” 

So, what’s going on?    

As we discussed earlier this year, in my March 24th note, the Fed had just dialed down the rate at which it was shrinking its balance sheet (quantitative tightening) from $25 billion to just $5 billion a month.  That was a sharp reduction, to a small amount, which meant they have effectively ended QT. 

Something was up. 

And once again, it was attributed to stress in money markets: “signs of increased tightness in money markets.”

This was the first clue that something in the financial plumbing was, again, breaking, and a Fed response is coming (including QE).

Here we are, nine months later, and the Fed is back to aggressively expanding the balance sheet again.

With that, as we’ve discussed many times in this daily note over the years: we’ve yet to see an example of a successful exit from QE (anywhere). 

Until proven otherwise, it’s Hotel California — “you can check out, but you can never leave.”

Perhaps the most important takeaway from today’s press conference was Powell’s admission on the “secular ongoing growth of the balance sheet.” 

He explicitly said, maintaining constant reserves, “calls for us to increase about $20-$25 billion dollars per month.”

Did the Fed Chair just admit the U.S. economy now requires the Fed to print $250-$300 billion a year, forever, just to tread water? 

That’s what he said.  And they’re going to ramp that number even higher over the coming months, just to be safe.  

So, the liquidity hose is now officially back on.

Powell also noted that rates are no longer “restrictive” but within the range of “neutral.” The headwind is gone (at least in the Fed consensus view).

Combine all of this with the fiscal side — with Trump floating $2,000 checks in the mail — and you have a massive green light for asset prices.

Finally, we have the geopolitical kicker.

The EU is stepping closer to monetizing frozen Russian assets.  This effectively breaks the seal on sovereign asset confiscation.

With that, we have this confluence of monetary debasement and global confiscation/distrust.  That’s a formula for much higher hard asset prices (particularly gold). 

 

The Fed kicked off this easing cycle back in September of last year.

And assuming no surprises tomorrow, they will have since cut rates by 175 basis points, to the range of 3.50%-3.75%.

When they started this cycle, the Fed Funds Rate was 283 basis points ABOVE the rate of inflation (PCE).   

As of tomorrow, it will be about 83 basis points above the rate of inflation — still restrictive, a headwind on economic growth.

When they started this easing cycle, the yield curve (10-year yield minus 2-year yield) was just returning to a positive slope, after two years of inversion.

And as we discussed at the time, yield curve inversions are historically predictors of recession.  And when the curve turns positive again, it tends to indicate an economy has either entered or is about to enter recession. 

But we haven’t had a technical recession (two consecutive quarters of GDP contraction).  Instead we’ve had an economy that will have probably grown at an average annual rate of around 2.5% by year-end.  Keep in mind, that’s growth above what the Fed thinks is the long-run potential of the economy (which is 1.8%).

So, do they think 2.5%-3% growth is excessive (above potential), and therefore must be inflationary?  Is this why they maintain a restrictive stance?  

It seems that way.

But also keep in mind, 3% real GDP growth is “average” in average times (5%-6% nominal growth).  And it’s probably recession, in an economy that’s still digesting $7 trillion of money supply growth in five years (over 40% M2 growth).

As we’ve discussed over the past few years, here in my daily notes, we should be getting a much bigger bang for our buck.  But the Fed has been, and continues to be a headwind to growth.

The Nasdaq is now ticking back toward the late October record highs.

This, after a 10% technical correction (peak-to-trough in the Nasdaq futures), accommodated by a story that conveniently fit the price.

After a flurry of deals between Nvidia, the hyperscalers and OpenAI, it became obvious that Nvidia was making meaningful investments into the ecosystem that would ultimately drive more demand (more revenue) for Nvidia GPUs.

Was it a shell game, moving money from one pocket to another? The signs of hubris we’ve seen in past bubbles?”

As I said in my November 3rd note (here):  In this case, it looks more like a feature of the AI infrastructure boom, not a bug.

It’s coordination across big tech, which accelerates the infrastructure build.  And that only widens the competitive moats.

For OpenAI, which is inherently at risk of losing ground to model commoditization, these deals give them the competitive advantage to widen the lead in scaling global AI usage — plus the cloud companies now have an incentive to see OpenAI stay relevant.

With that in mind, the past two months have shown that the competitive edge in AI is shifting from “who has the best model” to “who has the capital to lock down computing capacity.”

That’s why the IPO discussion is heating up.  There were reports today that Anthropic and OpenAI are looking to go public in 2026.

When the “price of staying relevant” becomes tens of billions of dollars — to hire and retain talent, secure GPU supply, reserve data center capacity, and fund power build-outs — the private market eventually hands the baton to the public market.

If we look at the parallels between the current environment and the late 90s technology revolution, we should expect a boom in IPOs.

Here’s a look at the volume of IPOs in the late 90s.  Importantly, the biggest surge came early, in 1996.  The frenzied return chasing came late, in 1999.

And let’s revisit how the late 90s IPO boom influenced the Wall Street kings of underwriting.

Here’s JP Morgan …

And let’s revisit how the late 90s IPO boom influenced the Wall Street kings of underwriting. 

Here’s JP Morgan … 

Citibank …

Morgan Stanley …

And no one was responsible for more IPO underwriting volume in that era than Goldman Sachs.  And they went public in 1999, in the height of the frenzy.  The stock went up 60% in 10 months, before the stock market topped in March of 2000. 

We went into the Thanksgiving holiday with the U.S. 10-year yield testing the important 4% level.

In our last note, we discussed a clean break below 4% as a potential tailwind for financial conditions — and a catalyst for the long-awaited narrowing of the performance gap between mega-cap tech and the rest of the market.

Historically, small caps tend to do better as policy moves from tight to easier. 

But despite the Fed’s current policy direction, the gap is still wide: the Nasdaq is up about 21% YTD versus 12% for the Russell 2000 (and only 9% for the equal-weight S&P).

That brings us to this week.  Yields are bouncing, not breaking lower.  And it’s not just the U.S. The move UP is global, and it’s being led by Japan.

Overnight, Bank of Japan Governor (Ueda) signaled the BOJ may resume rate hikes at the December 19 meeting.  With Japan still at near-zero rates, even small tightening matters, because Japan has been the world’s last major source of ultra-cheap money.

As that liquidity backstop fades, global yields can rise.  

On the policy path note, over the next three weeks we’ll hear from every major central bank.

As you can see below, most of the developed world is still in an easing posture — Japan remains the outlier, moving in the opposite direction.

Add to all of this, today also marks the official end of the Fed’s quantitative tightening (QT) campaign.  That means the Fed will now be watching liquidity conditions closely for the cue to pivot back toward balance sheet expansion again.  And if we listen to FOMC Vice Chair, John Williams, it will be “soon.”

So, bottom line: Despite the pop in global yields today, the Fed is set to deliver the fuel for stocks — another rate cut on December 10th plus balance sheet expansion coming “soon.”