The Federal Reserve's quantitative easing policy was introduced earlier than expected.
The bond market is sending signals that the Federal Reserve can no longer ignore.
The quantitative easing policy is about to return for the following reasons.
Since September 2024, the Federal Reserve has cumulatively cut interest rates by about 150 basis points.
Nevertheless, the yields on 10-year and 30-year government bonds are still higher than the levels before the first rate cut.
This means that the market believes the Federal Reserve made a policy error.
And in every past occurrence of this situation, the Federal Reserve has never acknowledged its mistakes.
It only did one thing, which is to restart the quantitative easing policy.
This time, it will be no different.
First, the cracks in the economy have already appeared.
Small banks in the U.S. are facing ongoing liquidity pressure.
They continue to seek emergency assistance from the Federal Reserve, including the latest infusion in December last year.
If small banks cannot raise funds, what the Federal Reserve needs is a long-term solution, not repeated emergency responses. For the Federal Reserve, the way to solve the problem is very straightforward: how to grasp the role of quantitative easing.
Federal Reserve buys government bonds → bond prices rise → yields fall → dollar weakens → liquidity expands.
This combination is extremely favorable for risk assets.
We have already seen the blueprint.
In 2020-2021, quantitative easing suppressed yields, the dollar strengthened, and liquidity exploded.
Risk assets have experienced one of the strongest rallies in history.
The price of Bitcoin rose from $3500 to $69000
Altcoins have experienced the most dramatic rise in history.
But signaling quantitative easing is not solely the responsibility of banks.
Major institutions also expect quantitative easing to make a comeback.
UBS expects the Federal Reserve to start purchasing about $40 billion in treasury bills at the beginning of 2026.
U.S. banks expect the Federal Reserve to announce a risk management plan.
(RMP), which will increase bank reserves.
Additionally, the Japanese bond market has put significant pressure on the Federal Reserve.
Due to rising Japanese government bond yields, investors are selling treasury bills, leading to soaring yields.
The market expects the Federal Reserve to step in to purchase these treasury bills in the coming months, thereby increasing yields.
Furthermore, most central banks around the world have already restarted easing policies.
China is easing regulations.
Despite rising yields, Japan is still easing financial regulations.
Canada is easing regulations, and the Federal Reserve is the last opponent.
Once it converges with other currencies, global liquidity will surge sharply.
Restoring quantitative easing means
Bond yields are decreasing
The dollar is weakening
Risk appetite has increased
More funds are flowing into Bitcoin, Ethereum, and other cryptocurrencies.
This is similar to the environment that triggered the super bull market of 2020-2021, and this situation may happen again.
