Morgan Stanley(US:MS) Hua Er Jie Jian Wen·2025-11-11 06:02Core Viewpoint - The Federal Reserve's decision to end quantitative tightening (QT) has sparked discussions about a potential policy shift, but it should not be interpreted as the beginning of a new easing cycle [1][2]. Group 1: Federal Reserve's Actions - The Federal Reserve announced it will end QT on December 1, which is about six months earlier than previously expected [1]. - The Fed will stop reducing its Treasury holdings but will continue to let approximately $15 billion of mortgage-backed securities (MBS) mature each month, replacing them with an equal amount of short-term Treasury bills (T-bills) [1]. - This operation is characterized as an asset swap rather than an increase in reserves, focusing on changing the composition of the balance sheet rather than expanding its size [1]. Group 2: Distinction from Quantitative Easing (QE) - It is crucial to distinguish this operation from quantitative easing (QE), which involves large-scale asset purchases to inject liquidity into the financial system [2]. - The Fed's current plan is merely an internal adjustment of its asset portfolio, not an increase in bank reserves, thus misinterpreting it as a restart of QE is incorrect [2]. - The cumulative impact of stopping the $5 billion monthly reduction in Treasury holdings is relatively minor, amounting to only $30 billion in the context of the Fed's large portfolio [2]. Group 3: Future Balance Sheet Expansion - Future expansion of the Fed's balance sheet is expected to occur only under extreme conditions, such as a severe recession or financial crisis, primarily for technical reasons to hedge against cash demand [3]. - The Fed may need to purchase additional Treasury securities to maintain stable reserve levels, potentially increasing its monthly purchases by $10 billion to $15 billion to match cash growth [3]. - This buying behavior is aimed at preventing a decline in reserves rather than increasing them, and should not be overinterpreted as a signal of monetary easing [3]. Group 4: Focus on Treasury's Issuance Strategy - The real focus for asset markets should shift from the Federal Reserve to the U.S. Treasury, which plays a key role in determining how much duration risk the market needs to absorb [4]. - The Treasury's recent strategy has leaned towards increasing the issuance of short-term bonds, and the Fed's purchase of short-term Treasuries may facilitate further short-term bond issuance by the Treasury [4]. - Ultimately, the Treasury's decisions will significantly influence market liquidity and interest rate trends, making it a core variable in market direction [12].