US Fiscal in Focus
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Economics Research7 Nov 2025
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US: Return of QE? The path for the Fed to keep cutting rates, a key demand of the Trump administration, is getting complicated. Fed communication turned more balanced last week following the widely expected rate cut at the October meeting. Chair Powell pushed back against the idea that another rate cut in December was a done deal. Several Fed officials, both voting and non-voting members of the FOMC, also voiced arguments for caution. Kansas City President Jeff Schmid, who voted against the rate cut, was joined by Dallas Fed President Lorie Logan and her Cleveland counterpart, Beth Hammack—both voting members next year—in highlighting that the case for continued rate cuts is not quite clear-cut. The US labour market is largely in balance, the economy shows continued momentum, and inflation remains well above target. Along this line of reasoning, substantial worsening of the labour market and significant easing of inflation will be needed to justify further accommodation.

We find logical alignment with the camp in favour of turning cautious, but we also recognise the political reality. In our view, the bar for further accommodation is rather low. The kind of pressure exerted by the White House, combined with job cuts announcements by large companies and no signs of a jump in inflation expectations, is sufficient to keep the Fed on course toward further rate cuts. We see the December rate cut taking place with rather high likelihood. Policy support, however, need not come from rate reduction alone. As recently indicated, the Fed is done with quantitative tightening (QT). With the central bank’s balance sheet declining to about USD6.6tn, signs of tightening liquidity have begun to emerge.

Both the market and the Fed have been following such developments closely. Last week, the Fed announced it would stop its 3Y effort balance sheet reduction on 1 Dec. Unlike rate cut decisions, the rationale for ending QT was widely shared among Fed officials. Given post-GFC regulations and the evolving structure of the US financial system since the Covid-19 pandemic, a much greater amount of bank reserves now appear warranted to maintain market stability. There is no returning to the balance sheets of the 2010s, let alone the 2000s.

The Fed will continue unwinding its portfolio of mortgage-backed securities, but proceeds will be reinvested into US Treasury bills, which in turn help fund the burgeoning fiscal deficit. While the central bank has not announced any additional liquidity measures to ease funding costs, we do not think that is too far off. If the recent rise in repo rates is not reversed in the coming months, the Fed could begin buying assets to keep reserves from falling further, which would mark a return to quantitative easing (QE). What was once considered as emergency measures to stave off a major financial crisis have become a routine part of liquidity management. QT is now conducted to keep liquidity at comfortable levels—and, in our view, possibly in response to political pressure. The Fed’s independence is reflected not only in its rates decisions; the QT to QE transition will show its decision-making latitude as well.

Figure 1: Fed balance sheet (% of US GDP)

Source: Bloomberg, DBS




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