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Data: Federal Reserve; Chart: Axios Visuals

The Fed's balance sheet shrank last week with holdings touching their lowest level since mid-December, the strongest decline since the Fed restarted its bond-buying program in September.

Why it matters: The Fed will likely have to address its longer-term plans for liquidity injections to the repo market and the program that Chairman Jerome Powell has insisted on referring to as "not QE," but many market participants have dubbed "QE4," or the fourth phase of quantitative easing.

  • Powell says the program is not a form of QE, a highly controversial stimulus program created to help dig the U.S. economy out of a hole after the financial crisis.
  • But even members of the Fed's rate-setting committee assert that the program is helping to boost the prices of risk assets like stocks.

Between the lines: That likely paints the Fed into a corner in addressing the program at its meeting tomorrow, Tom Essaye, director of Sevens Report Research, says in a note.

  • "[T]he dovish Fed has underwritten a lot of this four-plus-month rally, and they need to reassure markets they’re going to stay dovish this week."
  • "Conversely, if the Fed signals that it’s looking to determine an end to the repo operations, that will be hawkish and likely hit markets, potentially hard."

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Illustration: Aïda Amer/Axios

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