The Federal Reserve's Major Transformation: From QT to RMP, How Will the Market Change Dramatically in 2026?

Author: Wang Yongli

In the rapidly changing global financial markets, every decision made by the Federal Reserve pulls the nerves of countless investors. In recent years, our economic life has been like a roller coaster, sometimes speeding up and 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 entering a new chapter of "invisible easing."

Key Turning Point in 2025: End of QT and Introduction of RMP

Imagine that in the fourth quarter of 2025, the global financial markets welcomed an important milestone. The Federal Reserve, the most influential central bank in the world, made a historic decision. After nearly three years of "Quantitative Tightening" (QT) — that is, large-scale contraction of the balance sheet — they officially announced: on December 1, 2025, the QT plan will be terminated!

However, the story does not end there. In January 2026, a brand new strategy RMP (Reserve Management Purchases) was officially introduced. This somewhat academic-sounding new tool stirred up a storm on Wall Street as soon as it was announced. The Federal Reserve officially defined it as a "technical operation" aimed at maintaining a "sufficient" level of liquidity in the financial system to meet naturally growing demands.

The Federal Reserve's official wording tends to portray it as a routine, technical adjustment to ensure the smooth operation of the financial system. However, this sharply contrasts with the market's general interpretation — "covert easing."

Nevertheless, the market widely interprets it as a form of "covert easing," believing that the Federal Reserve may start to "loosen" again. So, which of these two completely different interpretations is closer to the truth? How will the introduction of RMP affect our future investment strategies?

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

To understand the far-reaching impact of RMP, we first need to review 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 initiation in June 2022, in just three years, the Federal Reserve's balance sheet size shrank from nearly $9 trillion to about $6.6 trillion, meaning $2.4 trillion of liquidity disappeared from the market.

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

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

Signals of Micro Liquidity Crisis: Divergence Between SOFR and IORB

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

This means that banks preferred to pay a higher premium in the market to borrow money (SOFR) rather than tapping into their seemingly "abundant" reserves held at the Federal Reserve (IORB). This phenomenon reveals the deep contradictions within the financial system:

• Uneven distribution of liquidity: Although the total amount of bank reserves seems sufficient, it is actually concentrated in a few large institutions.
• Changes in bank behavior patterns: Under regulatory pressure, banks are more cautious about their liquidity needs than ever before, even if they have idle funds, they are reluctant to lend them out.

Another core factor is the imbalance between the supply and demand of collateral and cash. To finance the massive fiscal deficit, the U.S. Treasury issued a record number of government bonds. These newly issued bonds flooded the repo market like a tsunami, requiring a large amount of cash to absorb them. However, the QT policy had already siphoned cash out of the system, creating a situation where "too much collateral chases too little cash," directly pushing up repo rates.

RMP Mechanism: A "Technical Fix" or "Covert Easing"?

Now, let's delve into the mechanism of RMP. The Federal Reserve defines it as a technical operation aimed at maintaining bank reserves at a "sufficient" level. This is fundamentally different from quantitative easing (QE).

RMP chooses to purchase short-term Treasury bills for three reasons:

1. Similar risk characteristics: Short-term Treasury bills and bank reserves have high liquidity and are both considered "quasi-cash," making their purchase almost free from duration risk transfer.
2. Avoiding additional stimulus: This helps the Federal Reserve maintain a "neutral" stance in its policy, avoiding being interpreted by the market as aggressive monetary easing.
3. Coordinating with the Treasury's bond issuance strategy: In the face of the Treasury's massive issuance of short-term Treasury bills, RMP's purchasing behavior effectively provides liquidity support for the Treasury's short-term financing.

The Mystery of RMP Scale: Discrepancies on Wall Street and Market Variables

In December 2025, the Federal Open Market Committee (FOMC) will officially announce the details of RMP and plans to implement it in January 2026. However, there is a huge divergence 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 faction": They believe that the current level of reserves is already in a relatively balanced state, and the purpose of RMP is merely to offset the natural growth of circulating currency. For example, Evercore ISI predicts a monthly purchase scale of about $3.5 billion.
• "Replenishment faction": Represented by Bank of America strategist Mark Cabana, they believe that the Federal Reserve "overdid it" during QT, causing reserves to fall below the "minimum comfort level," thus requiring large-scale replenishment. They predict a monthly purchase scale of up to $45 billion (normal demand of $20 billion + additional replenishment of $25 billion).

These two completely different predictions will lead to significant differences in market expectations for future liquidity.

How RMP Affects Risk Assets? "Crowding Out Effect" and "Balance Sheet Release"

Although the Federal Reserve emphasizes that RMP primarily purchases short-term Treasury bills, theoretically it should not produce asset price effects similar to QE, the reality of market operations is more complex.

1. Crowding Out Effect

When the Federal Reserve intervenes massively in the short-term Treasury bill market, it will lower the yields on short-term Treasury bills. To maintain yields, money market funds may allocate funds 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 of Primary Dealers

RMP directly alleviates the pressure on primary dealers holding Treasury inventories. When their balance sheet space is released, they have more capacity to provide liquidity intermediation services for other markets, such as margin financing in the stock market and market-making in corporate bonds. The restoration of this intermediation capability is a key support for the performance of risk assets.

Regulation and Fiscal Policy: Dual Pressure Behind RMP

Federal Reserve Governor Stephen Milan proposed a "regulatory-driven" hypothesis. He believes that the post-financial crisis regulatory framework, such as the Liquidity Coverage Ratio (LCR) and Basel III, forces banks to hold far more high-quality liquid assets than their actual operational needs. In the calculation of regulatory indicators and actual stress tests, cash (reserves) is often favored over Treasury bonds, leading to the rigidity and upward shift of the "minimum comfort level" of reserves. RMP is essentially the central bank's balance sheet expansion to meet liquidity demands created by regulation.

Moreover, the implementation of RMP is also inseparable from an important background — the sustained high level of the U.S. federal deficit.

"The Treasury issues short-term Treasury bills, and the Federal Reserve purchases short-term Treasury bills through RMP" — this closed-loop operation is essentially very close to "debt monetization." The Federal Reserve has become 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 decoupling of inflation expectations. This "fiscal dominance" pattern will further dilute the purchasing power of fiat currency, thereby favoring real assets, such as gold.

Asset Class Predictions: Market Reactions in an Aggressive Scenario

If the purchase volume of RMP reaches $45 billion per month in an aggressive scenario, how will the market react?

RMP Scenario Analysis and Institutional Investor Strategy Recommendations

In light of the uncertainty surrounding 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: The stock market rises moderately, volatility decreases, the dollar trades sideways, and the yield curve normalizes.

1. Scenario B: Liquidity Tsunami and Re-inflation (Probability 35%)

• The Federal Reserve purchases over $45 billion per month.
• Result: Risk assets experience "liquidity-driven increases," commodities soar, inflation expectations decouple, and the Federal Reserve may be forced to turn hawkish subsequently.

1. Scenario C: Policy Misstep and Liquidity Shock (Probability 25%)

• The Federal Reserve only purchases $3.5 billion.
• Result: The repo market experiences another crisis, basis trades blow up, the stock market sharply corrects, and the Federal Reserve may need to intervene urgently.

For institutional investors, corresponding strategy adjustments will be necessary in 2026:

• Focus on structural changes in volatility: With the end of QT, volatility driven by liquidity tightening will decrease, consider shorting the VIX index.
• Allocate "fiscal dominance" hedging portfolios: Overweight gold and real assets to hedge against the risk of declining purchasing power of fiat currency.
• Equity strategy: Tactically overweight small-cap stocks and technology stocks, while closely monitoring inflation data.
• Fixed income: Avoid merely holding cash or short-term Treasury bills, utilize steepening yield curve trades to achieve excess returns.

Conclusion: Liquidity Dominance in a New Paradigm

The transition from "Quantitative Tightening" to "Reserve Management Purchases" marks the substantial end of the Federal Reserve's attempts to normalize monetary policy. 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 a compromise under the dual pressures of "regulatory dominance" and "fiscal dominance."

For investors, the main theme in 2026 will no longer be "how much will the Federal Reserve raise interest rates," but rather "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 behind asset prices. Understanding RMP and grasping its potential impacts will help us better understand and respond to future market changes.

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