The Fed suddenly slammed the brakes - paused the balance sheet reduction. Is this really point shaving, or just taking a breather?

To put it bluntly, what we fear most now is not a rebound in inflation, but a direct stall in the economy. Recent data has already raised yellow flags, and if monetary tightening continues, we might really face a hard landing. But the problem is that inflation hasn't completely settled down yet, and the Fed is now like walking on a tightrope—going left leads to recession, going right leads to inflation, and there's no way to lean towards either side.

Pause tapering? It feels more like a last resort.

There is another more realistic problem: the US government's debt has become outrageous. When interest rates rise, just paying the interest is a huge burden. If the Fed continues to shrink its balance sheet and engage in point shaving, the fiscal side may not be able to hold on first. Therefore, you will find that monetary policy and fiscal policy are increasingly tied together now; controlling inflation alone is no longer the only goal, and consideration must be given to economic growth and debt sustainability.

What will the market look like?

Liquidity tightening will indeed ease somewhat, but don't celebrate too early – the Fed's balance sheet size is still far beyond pre-pandemic levels, and overall there is still plenty of money. It's just that this money will be more selective, flowing towards assets with strong certainty, while high-risk, low-quality targets may be discarded.

Market differentiation will become more obvious. Don't blindly chase after everything that rises; you need to clearly see whether companies are actually making money and where the policy signals are blowing.

If economic data continues to worsen in the coming months, the Fed may really have to turn to easing. However, considering that inflation has not completely cooled down, coupled with fiscal pressures, the extent and speed of point shaving will not be too aggressive. Those in the market expecting quick interest rate cuts may be disappointed. If policies fall short of expectations, volatility will come.

Ultimately, pausing the balance sheet reduction is more of a preventive measure, not a signal for a full shift towards easing. The future direction will still depend on inflation and employment data. In the short term, risk assets may have opportunities for a rebound, but in the long run, we need to keep a close eye on corporate fundamentals and policy changes.

After all, in such a complex environment of "high debt + high interest rates + low growth", the Fed has to be very careful with every step it takes, and we also need to proceed with caution.