On December 1st, the Fed officially pressed the pause button - the balance sheet reduction operation that started in June 2022, which compressed the balance sheet from nearly $9 trillion down to $6.6 trillion, has finally come to an end.

This time point is not chosen randomly. There are two hidden lines behind it:

Firstly, the economic data from the United States is starting to weaken. The growth momentum is insufficient, and the job market is not as lively as before. Continuing to withdraw liquidity at this time is akin to adding salt to a wound. The Fed clearly does not want to push the economy towards the brink of a hard landing.

Secondly, the reserve levels of the banking system are declining. If it continues to drop, it may not just be individual institutions facing problems, but rather systemic risks beginning to emerge.

Looking deeper, the bond purchases during the pandemic essentially extended the life of the Treasury Department. Now that it has stopped, part of the reason is the fear that the government's borrowing costs will continue to soar—after all, inflation is still hovering in the range of 2.8%-3.0%, and the economy shows signs of fatigue. The Fed is walking a tightrope between "stabilizing growth" and "controlling inflation."

How will the market react? In the short term, the liquidity pressure can indeed provide some relief. But don't be too quick to be optimistic.

The Fed's balance sheet has increased by more than 2 trillion dollars compared to pre-pandemic levels. Once this hot money gets restless, the volatility will only increase. Additionally, the economic data for October will not be released until December, creating a data vacuum period combined with a policy shift, which can easily lead to soaring expectations.

The tapering does not indicate a strengthening economy; rather, it exposes the dual pressures of the economy and liquidity. The interest rate cut cycle in 2025-2026 is likely to be faster and more aggressive than the market currently expects. The holding logic needs to be restructured.

What should we focus on at this stage? Three directions: the real situation after the economic data is released in October, the trend of changes in bank reserves, and the adjustment rhythm of interest rate cut expectations. The structural opportunities hidden behind this policy shift are worth laying out in advance.