Shenwan Hongyuan Group Co., Ltd. released a research report stating that following the December 2025 FOMC regular meeting, the Federal Reserve's restart of Reserve Management Purchases (RMP) ignited optimistic sentiment for "QE-style" liquidity easing. However, in reality, until the next economic crisis, the era of Quantitative Easing (QE) may already be over. The Fed's balance sheet expansion has entered a "new normal," but it cannot be compared to QE in terms of quantity, quality, and market implications. Shenwan Hongyuan's main views are as follows:
Since the 2008 Global Financial Crisis (GFC), the expansion of the Federal Reserve's balance sheet has been "unstoppable." From 2008 to 2026, the Fed implemented four rounds of balance sheet expansion (QE) and two rounds of balance sheet reduction (Quantitative Tighting, QT), also including one round of reinvestment and two rounds of Reserve Management Purchases (RMP). By the end of QT2 in November 2025, the Fed's total assets remained as high as $6.6 trillion, more than 7 times the level at the beginning of 2008 and 1.7 times the level at the end of QT1 in September 2019. The December 2025 FOMC meeting, where the Fed restarted RMP, marks the beginning of the "normalized balance sheet expansion" phase. In terms of quantity, the initial pace is $40 billion per month, potentially slowing to $20-25 billion after May. Medium-term, the pace of RMP expansion is expected to align with nominal GDP growth. Regarding maturity, the SOMA portfolio will primarily increase holdings of Treasury bills with maturities under one year, with 1-4 month bills comprising 75% and 4-12 month bills comprising 25%; in principle, coupon-bearing Treasuries with remaining maturities up to 3 years will only be purchased if T-bill supply is insufficient. RMP and QE are not comparable in terms of "quantity," "quality," or market implications. The essence of RMP is a new type of Open Market Operation (OMO) under the ample reserves framework, fundamentally different from the unconventional QE. The goal of RMP is to maintain an ample supply of reserves; it is unrelated to the monetary policy stance and does not affect the degree of monetary policy tightness or looseness. QE is an unconventional policy tool used under the zero lower bound constraint, intended to lower long-term rates (either risk-free rates or risk premiums) and further ease financial conditions.
Under the "ample reserves" framework, the policy rate and the quantity of reserves have become "decoupled." Following the GFC, the Fed's policy operation framework underwent a paradigm shift from "scarce reserves" to "ample reserves"—what changed was the method of controlling interest rates, not the interest rate "reaction function." During the scarce reserves era, the Fed controlled rates through high-frequency open market operations, with reserve supply following the "short-board principle." In the ample reserves era, the Fed controls rates through an "interest rate corridor," with reserve supply following the "long-board principle," conducting OMO only occasionally and proactively when reserves are scarce. The Fed's monetary policy framework faces a "trilemma": it is difficult to simultaneously achieve efficiency in controlling interest rates, low balance sheet costs, and low frequency of open market operations. The scarce reserves framework offers low effectiveness in controlling rates and high OMO frequency, but low balance sheet costs; the ample reserves framework offers high effectiveness in controlling rates and low OMO frequency, but high balance sheet costs. Regardless of the framework, the policy rate is the true "barometer" of monetary policy tightness, not the quantity of reserves. Under the ample reserves framework, the policy rate and reserve quantity are "decoupled," belonging to two separate decision-making systems. The policy rate still fits within the "Taylor rule" framework, requiring the Fed to balance its "dual mandate" (maximum employment and price stability).
The central bank's balance sheet is not a "one-way street" that can only expand, not contract. In fact, the Fed implemented QE from the Great Depression through World War II, and the Bank of Japan did so from 2001-2006, with both later returning to a scarce reserves framework. Whether, and to what extent, the balance sheet can "slim down" after QE depends mainly on two factors: reserve demand (related to financial regulation) and the duration of the securities held. In a state absent war or zero interest rates, it is highly improbable for the Fed to use QE or Yield Curve Control (YCC) to suppress US Treasury yields. Barring the extreme scenario of hot war, global central bank practices indicate that zero interest rates are a necessary condition for implementing QE or YCC. The logic is straightforward: the goal of QE or YCC is to lower long-term rates, and the most effective way to achieve this is to cut policy rates to zero (or negative). Looking at the Fed's rate-cutting cycle, 2026 might represent the "final leg" of the "wave of rate cuts" among Western central banks. Within the conventional monetary policy range, interest rates are "important," while balance sheet expansion is "unimportant." Therefore, 2026 is not the starting point of a "liquidity feast" in terms of Fed balance sheet expansion, but rather the "final leg" of the liquidity easing cycle in the sense of limited room for further rate cuts. From a market implications perspective, it is advisable to "rationally ignore" the impact of RMP on capital markets. The impact of RMP on US stocks is indirect and defensive—it can reduce the likelihood of US stock sell-offs triggered by liquidity shocks, but it does not constitute a bullish thesis. In other words, maintaining an ample supply of reserves helps smooth US stock volatility but does not change the market's direction. The situation is similar for US Treasuries.
Risk warnings: Escalation of geopolitical conflicts; US economic slowdown exceeding expectations; Federal Reserve turning more hawkish than expected.
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