Behind the Federal Reserve's Official Announcement of "Opening the Floodgates"

🚰 Core Policy Analysis
This so-called "liquidity injection" mainly involves the following three levels. The table below summarizes its key points and underlying logic:
1. Interest Rate Policy: Uncertainty Continues in the Rate Cut Cycle
· Current Actions and Forecasts: In December 2025, the Federal Reserve announced a 25 basis point rate cut, lowering the federal funds rate target range to 3.5%-3.75%. Its official forecast (dot plot) indicates that there may be only one more rate cut in 2026.
· Deep Logic and Divergences: This reflects significant disagreements within the Fed regarding how to balance risks amid a complex situation where inflation remains above the 2% target and signs of labor market softening appear. Some officials worry that excessive easing could entrench inflation, while others believe preemptive measures are needed to prevent an economic downturn.
2. Liquidity Operations: From "Quantitative Tightening" to "Reserve Management Purchases"
· Policy Shift: The Fed officially ended nearly three years of "quantitative tightening" in Q4 2025 and announced the launch of RMP (Reserve Management Purchases) starting January 2026, purchasing short-term government bonds.
· Nominal vs. Substantive: The Fed emphasizes that RMP is a "technical operation" to ensure sufficient liquidity in the financial system, not a new round of quantitative easing. However, some market views suggest that, against the backdrop of high federal fiscal deficits, this move could objectively create effects of "hidden easing" or "quasi-quantitative easing."
3. Policy Framework and Potential Leadership Shift
Markets are more focused on upcoming profound changes.
· Policy Framework Adjustment: Some analysts suggest that the Fed may be shifting from an "average inflation targeting" approach to a more flexible "flexible inflation targeting," providing a theoretical basis for more accommodative policies in the future.
· Leadership Change: Chairman Powell's term will end in May 2026, and former President Trump has indicated he will nominate a new chair. Currently, Kevin Hasset, former director of the National Economic Council, is viewed as the most likely nominee.
· Potential Impact: Hasset is considered a clear "dove," advocating "growth priority" and lower interest rates. If he takes office, he could push the Fed's policy framework toward a clearer stance supporting economic growth and lowering borrowing costs.
💎 Overall Impact and Future Outlook
Overall, the significance of this policy adjustment lies in:
1. Short-term Goals: Addressing liquidity structural blockages, meeting the higher reserve requirements caused by strict regulation, and stabilizing signs of weakness in the labor market.
2. Long-term Signal: Marking a shift in monetary policy focus from full-scale anti-inflation efforts to seeking rebalancing among inflation, growth, and employment. The 2026 policy path will largely depend on the new chair's selection and their ability to build consensus within a deeply divided committee.
3. Market Impact: The overall easing expectation supports risk assets, but the market has already partially priced in this expectation. Greater volatility may stem from gaps between policy expectations and reality, as well as uncertainties brought by leadership changes at the Fed. Institutions like JPMorgan Chase believe that if the labor market is softer than expected, there is still room for further rate cuts in 2026.
Looking ahead: In 2026, under the new framework and leadership, the Fed will walk a tightrope balancing "anti-inflation," "growth preservation," and "political pressure." This "liquidity injection" is not a floodgate opening but more like a precise drip irrigation seeking a balance amid inflation constraints and political demands, full of uncertainties.