At the beginning of December, an unassuming move suddenly stirred up waves in the market - the Fed announced a pause in the balance sheet reduction.

This "pump" that has been working at full capacity during the pandemic has withdrawn massive liquidity from the market over the past few years, and now it has suddenly stopped. Many people still haven't figured out what this means.

The timing is actually quite delicate. On one hand, inflation data stubbornly remains above 3%, while on the other hand, economic growth has clearly slowed down, and the job market is also cooling off. The Fed is in a somewhat awkward position: continuing to tighten may directly put the economy in a halt, but not tightening raises concerns about inflation rebounding. In this dilemma, hitting the pause button to observe can also be considered a strategy.

However, the deeper reason may be more realistic - fiscal pressure.

In recent years, the Fed has been buying a large amount of government bonds, essentially helping the government to share the burden of the deficit. If they continue to sell government bonds on a large scale now, the yields will soar, and the government's borrowing costs will explode directly. Therefore, pausing the balance sheet reduction is, to some extent, leaving a way out for the fiscal department. Monetary policy and fiscal policy are always mutually restraining.

For the market, this is indeed good news in the short term. The phase of tight liquidity may have come to a pause, allowing risk assets to breathe a sigh of relief. But don’t be too quick to be optimistic—the size of the balance sheet is still nearly two trillion dollars higher than before the pandemic, meaning that there isn’t actually much less money in the market. In this state, the market is more likely to diverge: the strong get stronger, and the weak get weaker.

There is another detail worth noting: some key economic data from the U.S. for October has been delayed for various reasons, coinciding with the "quiet window" of policy. The market lacks clear signals, and emotions can easily run out of control. The recent volatility in the crypto market and the stock market is largely related to this.

So what does this pause really mean? My judgment is that the Fed has sensed the signs of an economic downturn and has begun to prepare in advance. As for whether a new round of easing will actually come, it will depend on the inflation and employment data in the coming months. But what can be confirmed is that the previously strong stance of "raising interest rates at any cost" has quietly softened.

The market's sensitivity is often more acute than that of policies. Next, smart money will choose its direction more cautiously. If you are also looking for direction, you might as well stop and see where the wind blows, and money will follow.