On December 1st, the Federal Reserve suddenly announced a halt to its balance sheet reduction operations. This abrupt brake directly changed the tightening pace that had continued since June 2022.

Here’s the data: the Fed’s balance sheet has shrunk from a peak of nearly $9 trillion to $6.6 trillion. Now they’re stopping just like that—the timing is intriguing.

Why choose this moment?

Economic data has already flashed a yellow light. The slowdown in growth is no secret, and liquidity alarms in the money market have been ringing constantly. Keep draining liquidity? The market might really not be able to withstand it.

What’s trickier is the fiscal side—during the pandemic, the Fed went on a buying spree for U.S. Treasuries to inject funds into the government, covering more than half of issuance. If they keep shrinking the balance sheet and selling bonds now, the U.S. government’s borrowing costs could skyrocket.

How awkward is the Fed’s current position?
Inflation is still stuck at 3%, with some distance from the target; the job market has already started to show weakness, and the economy is clearly sluggish. Tame inflation or support growth? This situation is like walking a tightrope.

What does stopping balance sheet reduction mean for the market?

In the short term, global liquidity pressure will ease a bit. Money won’t be as tight, and risk assets can catch a breather.

But don’t get too excited—the Fed’s assets are still $2 trillion more than before the pandemic. If this hot money floods into the market, asset price volatility could be quite dramatic.

There’s another key variable: U.S. economic data for October was delayed until December due to the government shutdown. This data vacuum, combined with policy uncertainty, has already thrown market expectations into disarray. This is also a major driver behind recent wild swings in U.S. stocks.

To put it plainly, this pause in balance sheet reduction is both a clear signal that liquidity has bottomed and a shot in the arm for a weakening economy. The interest rate cut cycle for 2025-2026 is likely on the way, and a global asset repricing is imminent. Have you adjusted your portfolio?