The Federal Reserve is widely expected to deliver another quarter-point rate cut at its December 9–10 policy meeting, a move already priced into markets after weeks of easing financial conditions. Yet investors increasingly believe the most consequential outcome of the meeting may not be the rate decision at all, but rather what the Fed signals about its $6.5 trillion balance sheet — and how that guidance could shape liquidity, asset prices, and market psychology heading into 2026.

The stock market’s extraordinary resilience underscores the point. The S&P 500 ended last week at 6,870.40, less than 0.3% below its record high and up nearly 17% year-to-date, despite higher interest rates and uneven economic data. For many analysts, including PineBridge Investments’ Michael Kelly, this disconnect reflects the reality that two monetary policies are operating simultaneously: interest-rate policy, which remains restrictive, and balance-sheet policy, which has disproportionately benefited wealthier households and asset-rich investors. The latter, he argues, has significantly amplified the “wealth effect,” fueling consumption and supporting corporate earnings even as lower-income households and small businesses feel the strain of higher borrowing costs.

Recent credit-card data highlights the divide. Lower-income consumers are approaching credit limits and carrying larger balances, while upper-income consumers — less sensitive to interest rates — continue to drive overall spending. In this bifurcated environment, the Fed’s stance on liquidity and reserve management has become at least as important as the pace of rate cuts.

The central bank halted its balance-sheet runoff on December 1 after stress emerged in overnight funding markets, raising new questions about how quickly it might begin expanding its holdings again. Bank of America strategists expect the Fed to announce as early as next week that it will begin purchasing roughly $45 billion in short-term Treasury bills per month starting in January. The planned purchases would replenish reserves and prevent a repeat of the 2019 repo-market disruption — a key institutional memory shaping today’s cautious approach to liquidity.

Others see a slower and more modest resumption of balance-sheet growth. Vanguard’s Roger Hallam forecasts bill purchases of $15–20 billion per month beginning late in the first quarter or early in the second, emphasizing that such operations are routine rather than a signal of easier monetary policy. Still, investors tend to interpret reserve expansion as supportive for risk assets, particularly in an environment of low credit spreads and strong equity momentum.

Even with rate cuts expected, longer-term Treasury yields have moved higher, with the 10-year reaching 4.14% last week. This suggests that borrowing costs for households, corporations, and the U.S. government may remain elevated despite a lower policy rate — further elevating the significance of liquidity policy as a stabilizing force.

Kelly expects another 25-basis-point reduction this week and remains constructive on markets in 2026, arguing that any communication acknowledging the Fed’s intention to rebuild liquidity could extend the bull run. “I don’t know why the Fed is so eager to grow its balance sheet, but stingy to cut interest rates,” he said. “I would be doing it the other way.”

The backdrop reflects a market that has grown increasingly reliant on ample liquidity rather than low policy rates — a dynamic that could shape asset performance long after the Fed’s next cut is behind it.