Experts from Ned Davis Research express concerns about the American stock market next year, pointing to one of the main risks – a reduction in the balance sheet of the Federal Reserve System. This event may cause a liquidity shock against the background of a large issue of treasury bonds. The main argument is that if the Fed's balance sheet is reduced by $100 billion per month, a liquidity crisis may arise. Currently, $1.3 trillion has already disappeared from the market, compared with a peak of $9 trillion in 2022. The bulk of the reduction in the Fed's balance sheet was due to a reduction in the use of the reverse repo mechanism. The reverse REPO mechanism is the sale of securities by the Fed with an obligation to buy them back in the future. When this cycle of reducing the use of reverse repo operations ends, the Fed will reduce its balance sheet at the expense of reserves held in the country's banks. The main danger is that a reduction in the Fed's balance sheet could affect bank reserves and reduce liquidity in the market. This, in turn, may affect the provision of loans to enterprises and consumers of banks, which may limit economic growth.
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