Shenwan Hongyuan Group: The Fed begins a new phase of "normalization" of balance sheet expansion, restarting QE may need to wait for the next crisis.

Shenwan Hongyuan Group releases research report, stating that after the December 2025 FOMC meeting, the Federal Reserve initiated the preparation for Reserve Management Purchases (RMP), igniting optimistic sentiment towards "QE-style" liquidity easing. However, in reality, this signifies the end of the QE era, rather than a restart. There have been four periods in the Federal Reserve's hundred-year history where (similar to) QE-style balance sheet expansion occurred: during the Great Depression from 1929 to 1933, after the US entered World War II in 1941, after the Lehman bankruptcy in 2008, and after the public health crisis in 2020. All of these occurred after reaching zero interest rates. The Federal Reserve may have to wait until the next crisis to restart QE. Key points from Shenwan Hongyuan Group: Hot Topic Analysis: Expansion of the Federal Reserve's balance sheet and the end of the QE era (1) Reserve Management Purchases (RMP): A new phase of "normalized" balance sheet expansion for the Federal Reserve After the December 2025 FOMC meeting announced the restart of "balance sheet expansion," the pace slightly exceeded expectations but met liquidity management requirements. By the end of 2025, reserves may have declined to a sufficient level, necessitating advance expansion to adapt to economic growth needs and prevent disruptions in reserve demand due to seasonal factors. The Federal Reserve has entered a new phase of "normalized" balance sheet expansion, with two ways of providing reserves: Reserve Management Purchases (RMP) and Agency Securities Principal Reinvestments. RMP was implemented starting December 12th with an initial monthly scale of $40 billion, expected to remain high until April 2026, and then potentially slow down to an average of $20-25 billion per month. (2) Nature of RMP: Monetary market liquidity management, different from QE RMP is purely a technical operation aimed at assisting in the effective implementation of monetary policy and does not change the Federal Reserve's policy stance. The so-called "monetary policy" mainly refers to interest rate policy; the term "effective" means that without active and frequent open market operations, market interest rates remain stable around policy rates. "Stance" refers to whether the policy is loose or tight. RMP and QE both lead to the expansion of the Federal Reserve's balance sheet, but they have fundamental differences. From an accounting perspective, the impact of RMP and QE on the Federal Reserve and commercial banks' balance sheets is similar in terms of "quantity," but significantly different in terms of "quality." RMP is a routine liquidity management operation, while QE is a broad "yield curve management." RMP is approximately "market-neutral," while QE is "market-non-neutral." RMP is not a new tool, as it was also implemented after the end of balance sheet contraction in October 2019. In the medium term, to maintain sufficient reserves, the speed of normalized balance sheet expansion by the Federal Reserve may be broadly consistent with the nominal GDP growth rate. Under certain assumptions, the steady state conditions are such that the proportion of securities held by SOMA to GDP is approximately 20%-21%, and reserves/GDP are about 8.7%. (3) End of QE: The Federal Reserve may not restart QE until returning to "zero interest rates" Lowering interest rates to zero or near zero is a prerequisite for QE, which is an intrinsic order of monetary easing. Therefore, not all balance sheet expansions are called QE. The premise for QE is facing the constraint of the "zero interest rate" lower bound in monetary policy. Before reaching the "zero interest rate" lower bound, rate cuts are more effective policies for stimulating total demand. It is not advisable to reverse the order or neglect the inherent sequence in policy operations. This order is a global common experience and aligns with the Federal Reserve's practice since 1913. There have been four periods in the Federal Reserve's hundred-year history where (similar to) QE-style balance sheet expansion occurred: during the Great Depression from 1929 to 1933, after the US entered World War II in 1941, after the Lehman bankruptcy in 2008, and after the public health crisis in 2020. All of these occurred after reaching zero interest rates. The Federal Reserve may have to wait until the next crisis to restart QE. The broad asset implications of RMP and QE are fundamentally different. In the normal range of monetary policy, interest rates are the "barometer" of monetary policy stance, and too much emphasis should not be placed on the Federal Reserve's balance sheet operations, let alone using quantity indicators like total Federal Reserve assets or reserves to "measure" asset prices - as was the case before 2008 when the Federal Reserve's balance sheet was not an "effective tool" for market analysis. Risk Warning: Escalation of geopolitical conflicts; US economic slowdown exceeding expectations; Federal Reserve unexpectedly turning "hawkish."