Money Printer Engine Warming Up: Is the Fed Abandoning Tightening to Pave the Way for the Next Asset Bubble?

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The Federal Reserve is sending its clearest signal yet that its quantitative tightening (QT) policy aimed at shrinking the balance sheet may end ahead of schedule.

Recently, Federal Reserve Chairman Jerome Powell made it clear at the National Association for Business Economics meeting in Philadelphia: “Our long-standing plan has been to halt the balance sheet reduction when the level of reserves is just above the level we judge to be ample. We could reach that point within the next few months.” This statement has generally been interpreted by the market as the impending end of the most critical phase in the current monetary tightening cycle.

According to analysts, the Fed’s policy roadmap is now clearer than ever: First is rate cuts (currently underway), then halting quantitative tightening (just confirmed), and ultimately possibly launching a new round of quantitative easing (QE) in early 2026, commonly known as “printing money”.

This shift is not without warning signs. Weakening economic data is forcing policymakers to take action. Even without continued pressure from political figures such as Trump, the faltering jobs market and stressed real estate market are increasingly limiting the Fed’s policy options. Analysts believe rate cuts alone are no longer sufficient to meet the challenge. Ending QT and preparing for the next QE has become an unavoidable choice.

Policy Shift Under Economic Pressure

Behind the Fed’s policy shift are increasingly severe economic realities.

The jobs market is showing signs of collapse. According to statistics, since the beginning of this year, U.S. companies have announced 946,426 layoffs, an increase of 55% over the same period of 2024, and the highest since 2020.

Meanwhile, pressure in the real estate market is rising sharply. Google search data shows that American public interest in “mortgage assistance” has surged to its highest level since the 2008 financial crisis. The current average mortgage rate of about 6.3% is more than double the 3% rate locked in by most homeowners in 2020-2021. Coupled with 10-15% cumulative inflation over the past four years, many households are now under severe financial strain.

A Balance Sheet Far From “Normalization”

Ironically, the Fed is set to hastily end this round of quantitative tightening even as its balance sheet remains far from returning to normal levels.

Since initiating QT in June 2022, the Fed’s balance sheet has shrunk by $2.2 trillion. However, its total size still stands at $6.6 trillion. Compared with the pre-pandemic level of about $4 trillion, after nearly three years of “tightening,” the balance sheet has only been reduced by about 27%.

Reportedly, the Fed could have reduced its balance sheet more aggressively, such as by selling its bond holdings directly on the market. But policymakers worried that a massive sell-off of its $6.6 trillion portfolio might shock the bond market, so they chose a “gradual” path of letting bonds mature and not reinvesting. However, even this “snail’s pace” of tightening appears increasingly unsustainable.

Another comment by Powell at the same meeting further reinforced market expectations. He stated:

“Normalizing the size of our balance sheet does not mean going back to pre-pandemic levels.”

This has been interpreted as the Fed acknowledging a new “normal,” meaning a balance sheet that is 60% larger than pre-pandemic levels—reaching as high as $6.6 trillion.

Higher-Starting QE May Spur a New Round of Inflation

For investors, the most direct risk is that when the Fed inevitably restarts QE to suppress long-term interest rates, it will be doing so from an unprecedented high level.

An analysis by Lau Vegys for InternationalMan.com points out that launching a fresh round of monetary expansion from $6.6 trillion (rather than a more “normal” $4 trillion), while massive pandemic-era liquidity still remains in the system, will almost certainly trigger double-digit inflation. The analysis warns this could erode the dollar’s purchasing power at an unprecedented scale and speed.

Therefore, when the Fed’s “printing machine” warms up again, investors need to prepare corresponding strategies for the potential arrival of high inflation and a new round of asset price volatility.

Risk Warning and DisclaimerThe market has risks, and investments must be made cautiously. This article does not constitute individual investment advice and does not consider the unique investment goals, financial status, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are applicable to their specific circumstances. Investments made accordingly are at your own risk. ```