Balance Sheet Dominance | Joseph Wang | 27 Oct 2025

The Core Thesis

Joseph Wang argues that the Federal Reserve is losing its independence over its balance sheet policy due to the massive U.S. fiscal deficit. This "Balance Sheet Dominance" means the Fed’s balance sheet size is now dictated by the need to fund the government and keep the repo market stable, rather than by purely discretionary monetary policy goals.

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1. The Demand for Repo Financing

• Leveraged Treasuries: The ~$2 trillion annual fiscal deficit is being partially financed by leveraged investors (e.g., hedge funds doing the cash-futures basis trade).
• Insatiable Demand: As the supply of Treasuries increases, the demand for repo loans to finance these holdings grows. Repo volumes have surged alongside the growth of the deficit and the Fed's Quantitative Tightening (QT) program.

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2. The Dwindling Supply of Cash

• The RRP Buffer is Gone: Historically, Money Market Funds (MMFs) provided repo liquidity by pulling cash from the Fed’s Reverse Repo (RRP) facility. As RRP balances have dwindled toward zero, that "easy" source of cash has been exhausted.
• The Marginal Lender: The next source of cash is commercial banks. However, banks only lend their reserves into the repo market when rates rise above the Interest on Reserves (IOR). This creates upward pressure and volatility in short-term interest rates.

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3. The End of Quantitative Tightening (QT)

• The Fed is wary of a repeat of the September 2019 repo spike. It views rising repo rates as a signal that bank reserves are becoming scarce.