At its October monetary policy meeting, the U.S. Federal Reserve announced that it would officially terminate its balance sheet reduction operation on December 1, 2025, marking the end of its more than three-year quantitative tightening policy. Data shows that during this period, the scale of the Fed’s securities holdings decreased by a total of $2.2 trillion, and the proportion of its balance sheet to nominal GDP dropped from 35% to approximately 21%. This round of balance sheet reduction has had a profound impact on the global liquidity environment.
The decision to end the balance sheet reduction was based on multiple economic considerations: the partial shutdown of the U.S. federal government led to delays in the release of key data such as the September non-farm payroll report, affecting the accuracy of policy judgments; the job market faces downward risks, with a slight increase in the unemployment rate; at the same time, although inflation has rebounded compared to the beginning of the year, it remains within a controllable range. Federal Reserve Chair Jerome Powell emphasized that a further rate cut in December is “not a done deal,” highlighting the prudence in policy-making.
This policy shift will reshape the pattern of global capital flows. The IMF, in its Global Financial Stability Report, pointed out that the depreciation of the U.S. dollar this year and the divergence in U.S.-European interest rate trends have led to an increase in foreign exchange hedging demand among non-U.S. investors. After the termination of the balance sheet reduction, the demand for short-term U.S. Treasury securities will increase significantly, which may lower long-term yields and thereby affect the financing costs of emerging markets. For emerging market countries, this may ease the pressure of capital outflows, but they also need to be alert to market volatility caused by subsequent policy reversals. Market pricing shows that investors generally expect the Fed’s next policy adjustment may be delayed until the first quarter of 2026.
