UBS: The Federal Reserve may once again implement quantitative easing policies with a scale reaching 5-6 trillion US dollars.

UBS stated that on April 11, 2025, the urgent need for cash led to the selling off of various assets, including US Treasury bonds. Despite concerns about deflation, bond yields have recently risen. The Federal Reserve's balance sheet fluctuates with the economic cycle - expanding during crises, contracting from peak levels during economic recovery, until the next crisis hits and the Fed expands the balance sheet again. With the current progress of quantitative tightening policies, the Fed's balance sheet has reduced by about 25% from its peak in 2022, marking the largest "contraction" in 20 years. If history is any indication, the Fed may need to implement quantitative easing again. During the global financial crisis and the COVID-19 pandemic, the Fed's balance sheet expanded by an amount equivalent to 19% of US GDP. Although this may be coincidental, it suggests that this round of quantitative easing could reach 5-6 trillion US dollars. UBS's main points are as follows: On April 11, 2025, the urgent need for cash led to the selling off of various assets, including US Treasury bonds. Despite concerns about deflation, bond yields have recently risen. Is the Fed's choice of quantitative easing to support bond sales only a matter of time? Would announcing quantitative easing be a signal of the stock market bottoming out? Will the Fed cut rates to zero before implementing quantitative easing? Looking back on recent history of quantitative easing, a common pattern can be observed: the Fed cuts rates, the stock market peaks, quantitative easing is initiated, and then the stock market bottoms out. Key observations: Quantitative easing policies usually begin 8-12 months after the Fed's first rate cut. The Fed typically implements quantitative easing immediately after lowering rates to 1% or 0.25%. The stock market tends to bottom out after the announcement of quantitative easing (4 months after the announcement during the global financial crisis, 8 days after the announcement during the COVID-19 pandemic). While the quantitative easing policy has not been implemented yet, it is worth looking at market performance six months after the Fed started expanding its balance sheet in 2008 and 2019. Key findings: Quantitative easing policies usually coincide with Fed rate cuts. The macroeconomic background for implementing quantitative easing is risk aversion, poor stock market performance, widening credit spreads, and increased volatility in the stock, bond, and foreign exchange markets. Long duration assets tend to perform well, as the Fed directly purchases bonds from the market. Market preference shifts towards growth stocks rather than value stocks, as the market expects quantitative easing to drive future economic growth. Given the background of risk aversion, foreign exchange carry trade strategies do not perform well. As the US-Japan interest rate spread narrows and foreign exchange carry trades unwind, the USD/JPY exchange rate falls. Commodity markets show mixed performance, with safe-haven assets like gold performing well, while commodities sensitive to economic growth like oil and copper see a decline in prices.