The Fed’s Most Important Shift Isn’t in the Headlines

Key Takeaways

Media and political narratives have obscured the most important recent shift in U.S. monetary policy.
In December, the Federal Reserve executed its most significant policy pivot in at least six years by ending quantitative tightening (QT).
While headlines emphasized rate cuts and a “pause,” the more consequential change was a reversal in balance sheet policy.
Over the past 3–4 years, the Fed had been withdrawing liquidity at a historic pace — shrinking its balance sheet even as it signaled easing.
That stance has now reversed: the Fed has moved from removing approximately $50 billion per month of liquidity to injecting roughly $40 billion per month into the financial system.
Balance sheet policy affects economic activity and asset prices more directly and with shorter lags than interest rate signaling alone.
Real-time inflation measures suggest inflation has normalized (~1.45% YoY), giving the Fed flexibility to add liquidity without destabilizing prices.
Economic fundamentals remain supportive, with strong GDP growth, positive real wage gains, and a labor market that continues to expand.
The economy appears to be in the early stages of a new liquidity-driven cycle, where the effects of easing are only beginning to be felt.
Liquidity-sensitive assets have historically responded early in such environments; recent market behavior suggests conditions may be turning.
The evolving policy backdrop supports a constructive outlook for portfolios positioned to benefit from improving liquidity and economic acceleration.

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Comments dated 1/21/26.

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