The Fed has finally stopped tightening, and this happened faster than expected.

On December 1st, the quantitative tightening officially hit the pause button. Over the past two and a half years, the Fed has withdrawn $2.42 trillion from the market—its balance sheet shrinking from $8.96 trillion to $6.54 trillion. Now the tide has turned: the money from maturing bonds no longer disappears but is instead used to buy short-term government bonds, effectively replenishing the market with $25 to $35 billion each month. Bank reserves have already increased by $50 billion, and the liquidity faucet is slowly being turned on.

Looking back at history, it is interesting to note the QT halt in August 2019. At that time, the balance sheet was stable at 3.8 trillion, and the market did not immediately surge, but it laid the groundwork for subsequent quantitative easing—risk assets eventually experienced a significant rebound. After the FOMC statement this time, the 10-year U.S. Treasury yield plummeted 20 basis points in two days, dropping from 4.28% to 4.08%, and the sentiment for risk assets clearly improved.

Powell says this is not a restart of QE, but everyone knows: stopping QT is often the appetizer for a loosening cycle. After stopping for two months in 2019, interest rates were cut, and in 2020, unlimited QE was directly initiated. Will the current script be replayed? The key depends on how the inflation data in January goes.

The window for liquidity easing may be closer than expected; at least for market sentiment, this round of operations has already acted as a stabilizer.