Federal Reserve’s Major Shift: From QT to RMP, How Will the Market Transform by 2026?

Author: Wang Yongli

 

In the ever-changing global financial markets, every decision made by the Federal Reserve tugs at the nerves of countless investors. In recent years, our economic life has felt like riding a roller coaster—sometimes accelerating, sometimes slowing down. Among the many policy tools, a new strategy called "Reserve Management Purchases" (RMP) is quietly emerging, signaling that the financial markets may be ushering in a new chapter of "stealth easing."

The Key Turning Point of 2025: The End of QT and the Debut of RMP

Imagine the fourth quarter of 2025, when the global financial markets reach a significant milestone. The Federal Reserve, the world's most influential central bank, makes a historic decision. After nearly three years of "Quantitative Tightening" (QT)—that is, large-scale balance sheet reduction—they officially announce: on December 1, 2025, the QT program will end!

However, the story does not end there. Immediately after, in January 2026, a brand-new strategy, RMP (Reserve Management Purchases), is officially launched. This somewhat academic-sounding new tool caused a huge stir on Wall Street as soon as it was announced. The Federal Reserve officially defines it as a "technical operation" aimed at maintaining an "ample" level of liquidity in the financial system to meet naturally growing demand.

The Federal Reserve's official language tends to portray it as a routine, technical adjustment to ensure the smooth operation of the financial system. But this stands in stark contrast to the market's widespread interpretation—"stealth easing."

However, the market generally interprets it as a form of "stealth easing," believing that the Federal Reserve may be about to "flood the market" again. So, which of these two sharply different interpretations is closer to the truth? How will the advent of RMP affect our future investment strategies?

The End of QT: The Financial "Vacuum Cleaner" Meets Resistance

To understand the far-reaching impact of RMP, we must first look back at the end of QT. Before the end of 2025, the Federal Reserve's quantitative tightening policy was like a giant "vacuum cleaner," continuously sucking liquidity out of the global financial system. Since its launch in June 2022, in just three years, the Federal Reserve's balance sheet shrank from a peak of nearly $9 trillion to about $6.6 trillion, meaning $2.4 trillion in liquidity disappeared from the market.

However, by the second half of 2025, this "vacuum cleaner" encountered unprecedented resistance. The Federal Reserve decided at its October meeting that year to end QT, not because it had fully achieved its inflation targets, but out of deep concern for financial stability.

We can liken the money market at that time to a giant reservoir. Although the total amount of water seemed abundant, most of it was trapped in a few "tanks," while the vast "fields"—the microeconomic sectors truly in need of funds—remained dry or even cracked. This structural imbalance in liquidity distribution was the fundamental reason for the Federal Reserve's shift to RMP.

Micro Liquidity Crisis Signals: The Divergence Between SOFR and IORB

What forced the Federal Reserve to abandon balance sheet reduction? A series of "micro liquidity crisis" signals in 2025 were key. The most notable was the strange divergence—a significant positive spread—between the Secured Overnight Financing Rate (SOFR) and the Interest on Reserve Balances (IORB).

This meant that banks would rather pay a higher premium to borrow money in the market (SOFR) than use their seemingly "ample" reserves held at the Federal Reserve (IORB). This phenomenon revealed deep contradictions within the financial system:

• Extremely uneven liquidity distribution: Although the total amount of bank reserves appeared sufficient, in reality, they were concentrated in a few large institutions.
• Changes in bank behavior: Under regulatory pressure, banks' demand for liquidity became more cautious than ever, and even idle funds were not easily lent out.

Another core factor was the imbalance between the supply and demand for collateral and cash. To finance its massive fiscal deficit, the U.S. Treasury issued a record number of Treasuries. These newly issued Treasuries flooded into the repo market like a tsunami, requiring large amounts of cash to absorb them. However, QT policy had already drained cash from the system, resulting in "too much collateral chasing too little cash," directly pushing up repo rates.

The RMP Mechanism: "Technical Fix" or "Stealth Easing"?

Now, let's take a closer look at the RMP mechanism. The Federal Reserve defines it as a technical operation aimed at keeping bank reserves at an "ample" level. This is fundamentally different from Quantitative Easing (QE).

There are three reasons why RMP chooses to purchase short-term Treasury bills:

1. Similar risk characteristics: Short-term Treasury bills and bank reserves are highly liquid and are considered "quasi-cash," so buying them involves almost no duration risk transfer.
2. Avoiding additional stimulus: This helps the Federal Reserve maintain a "neutral" policy stance and avoids being interpreted by the market as aggressive monetary easing.
3. Coordinating with Treasury's debt issuance strategy: In the face of the Treasury's large issuance of short-term bills, RMP's purchases actually provide liquidity support for the Treasury's short-term financing.

The Mystery of RMP Scale: Wall Street's Disagreements and Market Variables

In December 2025, the Federal Open Market Committee (FOMC) will officially announce the details of RMP and plans to implement it starting January 2026. However, there are huge disagreements among Wall Street analysts regarding the specific purchase scale of RMP, which also constitutes the biggest market variable in the first quarter of 2026.

The market is mainly divided into two camps:

• "Maintenance camp": They believe that the current reserve level is already relatively balanced, and the purpose of RMP is merely to offset the natural growth of currency in circulation. For example, Evercore ISI predicts a monthly purchase scale of about $3.5 billion.
• "Replenishment camp": Represented by Bank of America strategist Mark Cabana, they believe the Federal Reserve "overdid it" during QT, causing reserves to fall below the "minimum comfortable level," and thus a large-scale replenishment is needed. They predict a monthly purchase scale as high as $45 billion (normalized demand of $20 billion + additional replenishment of $25 billion).

These two sharply different forecasts will lead to huge differences in market expectations for future liquidity.

How Will RMP Affect Risk Assets? "Crowding-Out Effect" and "Balance Sheet Release"

Although the Federal Reserve emphasizes that RMP mainly purchases short-term Treasury bills and theoretically should not have QE-like effects on asset prices, the actual market operation mechanism is more complex.

1. Crowding-Out Effect

When the Federal Reserve intervenes massively in the short-term Treasury bill market, it will depress the yields on short-term Treasury bills. To maintain yields, money market funds may allocate capital to higher-yielding commercial paper, repo lending, or even short-term corporate bonds.

This "crowding-out effect" will prompt liquidity to flow from the government sector to the private credit sector, thereby indirectly boosting the performance of risk assets.

2. Balance Sheet Release for Primary Dealers

RMP directly relieves the inventory pressure of primary dealers holding Treasuries. When their balance sheet space is freed up, they have more capacity to provide liquidity intermediation services for other markets, such as stock margin trading and corporate bond market making. The restoration of this intermediation capacity is a key support for the performance of risk assets.

Regulation and Fiscal Policy: The Dual Pressure Behind RMP

Federal Reserve Governor Steven Miran proposed a "regulation-driven" hypothesis. He believes that post-financial crisis regulatory frameworks, such as the Liquidity Coverage Ratio (LCR) and Basel III, force banks to hold high-quality liquid assets far in excess of actual operational needs. In regulatory metric calculations and actual stress tests, cash (reserves) is often preferred over Treasuries, leading to a rigid and elevated "minimum comfortable reserve level." RMP is essentially a central bank balance sheet expansion to meet the liquidity demand created by regulation.

In addition, the implementation of RMP cannot be separated from an important background—the continued high level of the U.S. federal deficit.

"The Treasury issues short-term bills, and the Federal Reserve purchases short-term bills through RMP"—this closed-loop operation is, in essence, extremely close to "debt monetization." The Federal Reserve becomes the marginal buyer of the Treasury's short-term debt, which not only lowers the government's short-term financing costs but also raises concerns about the weakening of central bank independence and the unanchoring of inflation expectations. This "fiscal dominance" pattern will further dilute the purchasing power of fiat currency, thereby benefiting physical assets such as gold.

Asset Class Forecasts: Market Reactions in an Aggressive Scenario

If RMP purchases reach an aggressive scenario of $45 billion per month, how will the market react?

RMP Scenario Analysis and Institutional Investor Strategy Recommendations

Facing uncertainty over the scale of RMP, we can make the following scenario assumptions:

1. Scenario A: Soft Landing and Technical Fix (Probability 40%)
• The Federal Reserve purchases $20-30 billion per month.
• Result: Moderate stock market rise, lower volatility, flat dollar, yield curve normalization.
2. Scenario B: Liquidity Tsunami and Reflation (Probability 35%)
• The Federal Reserve purchases more than $45 billion per month.
• Result: Risk assets experience a "melt-up," commodities soar, inflation expectations become unanchored, and the Federal Reserve may be forced to turn hawkish later.
3. Scenario C: Policy Error and Liquidity Shock (Probability 25%)
• The Federal Reserve purchases only $3.5 billion.
• Result: Repo market crisis erupts again, basis trades blow up, stock market sharply corrects, and the Federal Reserve may need to intervene urgently.

For institutional investors, 2026 will require corresponding strategy adjustments:

• Focus on structural changes in volatility: As QT ends, volatility driven by liquidity tightening will decline, so consider shorting the VIX index.
• Allocate a "fiscal dominance" hedging portfolio: Overweight gold and physical assets to hedge against the risk of declining fiat currency purchasing power.
• Equity strategy: Tactically overweight small-cap and tech stocks, and closely monitor inflation data.
• Fixed income: Avoid simply holding cash or short-term Treasury bills; use yield curve steepening trades to capture excess returns.

Conclusion: Liquidity Dominance in the New Paradigm

The transition from "quantitative tightening" to "reserve management purchases" marks the substantive end of the Federal Reserve's attempt at policy normalization. This reveals a deeper reality: the modern financial system's dependence on central bank liquidity has become a structural ailment. RMP is not just a technical "pipeline repair" but also a compromise with the dual pressures of "regulation dominance" and "fiscal dominance."

For investors, the main theme of 2026 will no longer be "how much will the Federal Reserve raise rates," but "how much money does the Federal Reserve need to print to keep the system running." In this new paradigm, liquidity will once again become the decisive force in asset prices. Understanding RMP and mastering its potential impact will help us better understand and respond to future market changes.

 

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