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The Fed Quietly Flipped The Switch: Why 2026 Could Feel Very Different
(MENAFN- The Rio Times) Key Points
The US central bank has stopped shrinking its balance sheet because the funding“plumbing” was straining, not because the real economy collapsed.
The next step is a slow return to bond buying to keep the system liquid – officially“technical”, but in practice a fresh wave of money into markets.
The last time this happened, stocks, tech, gold and bitcoin soared while cautious savers in cash fell behind; something similar could now build into 2026.
Something very important just happened in the global financial system – and it barely made the evening news.
On 1 December, the US Federal Reserve ended“quantitative tightening”, the process of slowly shrinking the huge pile of bonds it bought during the pandemic. There was no drama, no emergency press conference, but the direction of travel quietly flipped.
For three years the Fed has been draining water out of the pool. Its balance sheet, which had swelled to nearly 9 trillion dollars in 2022, has been pushed down to about 6.6 trillion. That was deliberate: the Fed wanted to pull back excess cash and show it could normalise after years of ultra-loose policy.
But it also promised not to push its luck. Under the current regime, banks are supposed to hold“ample” reserves at the Fed. Too much, and markets get lazy. Too little, and the pipes start rattling.
By early November, the rattling had begun. Interest rates in the repo market – where banks and funds borrow cash overnight against safe collateral – were drifting higher than the Fed was comfortable with. The key policy rate was trading near the top of its official target range.
A back-up facility the Fed built after the 2019 funding scare, the Standing Repo Facility, suddenly saw usage jump into the tens of billions of dollars on stressed days. None of this meant panic, but it did mean the system was running low on spare cash.
Senior officials started to speak more plainly. John Williams, who oversees the New York Fed and the“plumbing”, said the decision to stop shrinking the balance sheet on 1 December was driven by“clear market-based signs” that reserves had moved from abundant to just above ample.
Lorie Logan in Dallas, a former head of the New York trading desk, warned that if repo rates stayed high the Fed would have to start buying assets again simply to keep reserves from falling too far.
This is the real story behind the headline that QT has ended. The Fed did not stop because growth collapsed or unemployment spiked.
It stopped because the pipes of the financial system were starting to strain. In a debt-heavy world built on cheap dollars, the central bank can only drain so much before the walls creak.
What comes next is more subtle, and more powerful for markets. The Fed plans to hold its balance sheet roughly flat for a while, then begin what it calls“reserve-management purchases” of short-term Treasury bills.
In plain English: it will go back to buying government debt, in modest monthly amounts, to stop reserves from shrinking as cash in circulation and other obligations grow.
Officials are careful to say this is not a new stimulus programme. They stress that it does not signal easier policy on inflation or interest rates.
But from the point of view of markets, the label matters less than the flow. When the Fed goes from being a net seller of bonds to a net buyer, extra liquidity creeps back into the system.
This is not theory. In 2019, after an earlier round of balance-sheet shrinkage, repo markets briefly blew out and overnight rates spiked into double digits.
The Fed responded with aggressive repo operations and then with about 60 billion dollars a month of T-bill purchases. It insisted this was not“quantitative easing”. Markets treated it as exactly that.
Over the next several months, major stock indices climbed strongly, and assets that like abundant liquidity – technology shares, gold, bitcoin – all gained.
Then in 2020 and 2021, when the pandemic hit and the Fed opened the taps fully, the pattern became extreme. The balance sheet roughly doubled, and big US equity benchmarks delivered back-to-back years of strong double-digit returns.
Gold pushed to record highs. Bitcoin went from a few thousand dollars to nearly 69,000 at its peak. The underlying economy was chaotic. Asset prices floated on a sea of central-bank money.
Today's set-up is less spectacular but more uncomfortable. The balance sheet is already huge. The US government is still running deficits of around 1.8 trillion dollars a year in what is supposed to be peacetime and full employment.
Politics in Washington rewards constant spending and new programmes; reversing those decisions is far harder than announcing them.
In the background, the Fed is once again being pushed into the role of firefighter, forced to keep funding markets calm even while it talks tough on inflation.
For expats and foreign investors watching from São Paulo, Rio, Lisbon or Dubai, the lesson is not that the dollar will vanish tomorrow. It is that the world's main reserve currency is managed inside a political system that struggles to live within its means.
A central bank that has quietly buried QT and is preparing to buy bonds again is one that will likely support asset prices over the long run, even if it protests that it is only tending the pipes.
That has consequences. Savers who sit in cash, trusting official promises while governments pile up debt, tend to lose ground. Owners of productive assets, scarce commodities and strong businesses often gain when liquidity cycles turn.
Emerging markets that keep their own budgets tighter, respect investors and avoid constant policy experiments are likely to stand out in the next wave of global risk-taking.
The Fed's move on 1 December will not show up in your local supermarket prices tomorrow. But for anyone living outside the United States and paid, invested or indebted in dollars, it is a quiet turning point worth understanding – before the next liquidity tide is visible to everyone.
The US central bank has stopped shrinking its balance sheet because the funding“plumbing” was straining, not because the real economy collapsed.
The next step is a slow return to bond buying to keep the system liquid – officially“technical”, but in practice a fresh wave of money into markets.
The last time this happened, stocks, tech, gold and bitcoin soared while cautious savers in cash fell behind; something similar could now build into 2026.
Something very important just happened in the global financial system – and it barely made the evening news.
On 1 December, the US Federal Reserve ended“quantitative tightening”, the process of slowly shrinking the huge pile of bonds it bought during the pandemic. There was no drama, no emergency press conference, but the direction of travel quietly flipped.
For three years the Fed has been draining water out of the pool. Its balance sheet, which had swelled to nearly 9 trillion dollars in 2022, has been pushed down to about 6.6 trillion. That was deliberate: the Fed wanted to pull back excess cash and show it could normalise after years of ultra-loose policy.
But it also promised not to push its luck. Under the current regime, banks are supposed to hold“ample” reserves at the Fed. Too much, and markets get lazy. Too little, and the pipes start rattling.
By early November, the rattling had begun. Interest rates in the repo market – where banks and funds borrow cash overnight against safe collateral – were drifting higher than the Fed was comfortable with. The key policy rate was trading near the top of its official target range.
A back-up facility the Fed built after the 2019 funding scare, the Standing Repo Facility, suddenly saw usage jump into the tens of billions of dollars on stressed days. None of this meant panic, but it did mean the system was running low on spare cash.
Senior officials started to speak more plainly. John Williams, who oversees the New York Fed and the“plumbing”, said the decision to stop shrinking the balance sheet on 1 December was driven by“clear market-based signs” that reserves had moved from abundant to just above ample.
Lorie Logan in Dallas, a former head of the New York trading desk, warned that if repo rates stayed high the Fed would have to start buying assets again simply to keep reserves from falling too far.
This is the real story behind the headline that QT has ended. The Fed did not stop because growth collapsed or unemployment spiked.
It stopped because the pipes of the financial system were starting to strain. In a debt-heavy world built on cheap dollars, the central bank can only drain so much before the walls creak.
What comes next is more subtle, and more powerful for markets. The Fed plans to hold its balance sheet roughly flat for a while, then begin what it calls“reserve-management purchases” of short-term Treasury bills.
In plain English: it will go back to buying government debt, in modest monthly amounts, to stop reserves from shrinking as cash in circulation and other obligations grow.
Officials are careful to say this is not a new stimulus programme. They stress that it does not signal easier policy on inflation or interest rates.
But from the point of view of markets, the label matters less than the flow. When the Fed goes from being a net seller of bonds to a net buyer, extra liquidity creeps back into the system.
This is not theory. In 2019, after an earlier round of balance-sheet shrinkage, repo markets briefly blew out and overnight rates spiked into double digits.
The Fed responded with aggressive repo operations and then with about 60 billion dollars a month of T-bill purchases. It insisted this was not“quantitative easing”. Markets treated it as exactly that.
Over the next several months, major stock indices climbed strongly, and assets that like abundant liquidity – technology shares, gold, bitcoin – all gained.
Then in 2020 and 2021, when the pandemic hit and the Fed opened the taps fully, the pattern became extreme. The balance sheet roughly doubled, and big US equity benchmarks delivered back-to-back years of strong double-digit returns.
Gold pushed to record highs. Bitcoin went from a few thousand dollars to nearly 69,000 at its peak. The underlying economy was chaotic. Asset prices floated on a sea of central-bank money.
Today's set-up is less spectacular but more uncomfortable. The balance sheet is already huge. The US government is still running deficits of around 1.8 trillion dollars a year in what is supposed to be peacetime and full employment.
Politics in Washington rewards constant spending and new programmes; reversing those decisions is far harder than announcing them.
In the background, the Fed is once again being pushed into the role of firefighter, forced to keep funding markets calm even while it talks tough on inflation.
For expats and foreign investors watching from São Paulo, Rio, Lisbon or Dubai, the lesson is not that the dollar will vanish tomorrow. It is that the world's main reserve currency is managed inside a political system that struggles to live within its means.
A central bank that has quietly buried QT and is preparing to buy bonds again is one that will likely support asset prices over the long run, even if it protests that it is only tending the pipes.
That has consequences. Savers who sit in cash, trusting official promises while governments pile up debt, tend to lose ground. Owners of productive assets, scarce commodities and strong businesses often gain when liquidity cycles turn.
Emerging markets that keep their own budgets tighter, respect investors and avoid constant policy experiments are likely to stand out in the next wave of global risk-taking.
The Fed's move on 1 December will not show up in your local supermarket prices tomorrow. But for anyone living outside the United States and paid, invested or indebted in dollars, it is a quiet turning point worth understanding – before the next liquidity tide is visible to everyone.
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