Since October, U.S. financial institutions have faced increasing funding pressures, with dollar liquidity tightening and the currency staging a temporary rebound. On October 29, the FOMC announced that the Federal Reserve plans to conclude its quantitative tightening (QT) process by December 1, 2025. The operational details mirror the 2019 approach—halting Treasury bond reductions (letting them mature without reinvestment) while continuing to reduce mortgage-backed securities (MBS) at a monthly cap of $35 billion, with proceeds reinvested in Treasury bills (T-bills). Additionally, Chair Powell hinted at a potential resumption of balance sheet expansion next year. We believe this move not only supports dollar liquidity in aggregate but also structurally targets liquidity injections into the Treasury market, aiming to ease recent funding strains in short-term financing markets where Treasuries serve as primary collateral, thereby mitigating systemic liquidity risks. This also signals a blurring of monetary and fiscal boundaries. Under our baseline scenario, we expect the Fed to resume balance sheet expansion as early as Q1 2023 or by Q3 at the latest. If key funding spreads like SOFR-ONRRP or SOFR-IORB remain elevated at post-pandemic highs, an earlier resumption this year cannot be ruled out.

In our March report "Trump’s 'Great Reset': Debt Resolution, Rebalancing, and Dollar Depreciation" and August report "Entering Fiscal Dominance: Positioning for a Global Liquidity Rally," we argued that under Trump 2.0’s fiscal dominance, the Fed would likely restart balance sheet expansion, easing both quantity and price, further benefiting U.S. and Chinese equities as well as gold, silver, and copper. For allocations, we recommend focusing on one overarching theme—security and resilience amid shifting geopolitical dynamics—and two key drivers: productivity growth (technology and industrials) and resource self-sufficiency. On monetary-fiscal coordination, we highlight unconventional expansion methods, such as gold reserve revaluation.

Global liquidity has bottomed out in its cycle. Dollar liquidity is at its lowest since the pandemic. Since June 2022, the Fed has reduced its balance sheet by approximately $2.3 trillion (25.9% of assets), including $1.6 trillion in Treasuries and $600 billion in MBS. After April’s tariff retaliation triggered a selloff in U.S. stocks, bonds, and the dollar, the Fed slowed Treasury reductions to an average of $31.8 billion monthly from May to October. With the debt ceiling raised by $5 trillion in early July, net Treasury issuance reached $1.24 trillion from July to October, while $594 billion flowed into the TGA account. Consequently, narrow liquidity—measured by reserves—has fallen below the "ample liquidity" threshold ($3.1 trillion, or ~10% of GDP). Since October, the government shutdown has constrained fiscal spending even as net debt issuance continues, pushing TGA balances above $950 billion and exacerbating liquidity tightness.

Funding markets are feeling the strain. Discount window borrowings have risen steadily since July, while the Standing Repo Facility (SRF) saw borrowings exceed $5 billion for six days in October, peaking at over $10 billion on October 29—a level typically associated with stigma. Globally, liquidity is at a five-year low, with central bank assets/GDP ratios for the U.S., Eurozone, Japan, and the U.K. down 12.7%, 31%, 17.8%, and 20.1%, respectively, from June 2022. Narrow liquidity/GDP ratios have also declined significantly. Against elevated equity valuations and geopolitical risks, tight liquidity amplifies market volatility.

The repo market, a cornerstone of U.S. short-term funding where Treasuries account for ~60% of collateral, is under growing pressure. SOFR-ONRRP and SOFR-IORB spreads have widened to post-pandemic highs, signaling rising funding costs. Meanwhile, hedge funds’ Treasury basis trades—a key driver of repo demand—continue to expand. With fiscal deficits historically high and foreign/Fed Treasury purchases stagnant, U.S. financial institutions, particularly leveraged hedge funds, are absorbing more debt, compounding systemic risks. We expect the Fed to restart balance sheet expansion by Q1–Q3 2023, or sooner if funding spreads remain elevated.

We reiterate that the U.S. is entering a dual fiscal-monetary easing cycle: - **Fiscal**: The "Big and Beautiful" bill could add ~$400 billion to the deficit, pushing the full-year deficit/GDP ratio to 6.4%. Midterm election-year stimulus may further boost demand. A post-shutdown TGA drawdown of ~$1 trillion would inject liquidity. - **Monetary**: Balance sheet re-expansion could lift risk assets. With Treasury Secretary Besant overseeing the Fed chair selection process, watch for unconventional expansion tools—e.g., revaluing the Fed’s 8,000-ton gold reserve at market prices (~$4000/oz vs. $42.22/oz book value), which could generate ~$1 trillion in fiscal revenue and liquidity.

For assets, fiscal-monetary easing should restart the U.S. nominal growth cycle, supporting U.S./China equities and gold/silver/copper. Abundant dollar liquidity favors EM equities, especially underweight China. Sector-wise, focus on security/resilience themes and productivity/resource plays. While inflation may trend higher, a mild uptick is likely absent supply shocks. Ten-year yields and the dollar could rise near-term but retreat below 4.0% post-QT, with the dollar resuming its downtrend.

[1] Federal Reserve Press Release, October 29, 2025 [2] Federal Reserve Press Release, October 11, 2019 [3] FOMC Press Conference Transcript, October 29, 2025 [4] Fed Notes, August 6, 2025 [5] Fed Notes, August 1, 2025