UBS: The Federal Reserve may implement quantitative easing again, and the scale may reach 5-6 trillion US dollars

The Zhitong Finance App learned that on April 11, 2025, an urgent need for cash prompted various assets to be sold off, including US Treasury bonds. Despite concerns about deflation, bond yields have recently risen. The size of the Federal Reserve's balance sheet fluctuates with the economic cycle — expanding during the crisis, shrinking from peak value when the economy recovers, until the next crisis hits, the Fed once again expands the balance sheet size. As the current quantitative austerity policy progresses, the size of the Federal Reserve's balance sheet has shrunk by about 25% from its 2022 peak, which is the biggest “contraction” in 20 years. If history is instructive, it is time for the Federal Reserve to once again implement quantitative easing.

During the global financial crisis and the COVID-19 pandemic, the size of the Federal Reserve's balance sheet expanded by 19% of the US GDP. Although 19% is probably just a coincidence, this means that the scale of quantitative easing could reach 5-6 trillion US dollars this time around.

UBS's main views are as follows:

On April 11, 2025, an urgent need for cash prompted a sell-off of various assets, including US Treasury bonds. Despite concerns about deflation, bond yields have recently risen.

Is it only a matter of time before the Federal Reserve chooses quantitative easing to support treasury bond sales? If the Federal Reserve announces quantitative easing, will this be a sign that the stock market has bottomed out? Will the Federal Reserve cut interest rates to zero before implementing quantitative easing?

Looking back at the recent history of quantitative easing, we can find a common pattern: first the Federal Reserve cut interest rates, then the stock market peaked, then the quantitative easing policy was launched, and finally the stock market bottomed out.

During the global financial crisis:

During the Covid pandemic:

Under the threat of tariffs and recession in 2025:

Time node

Quantitative easing usually starts 8-12 months after the Federal Reserve first cuts interest rates. - Quantitative easing policies are often implemented immediately after the Federal Reserve cuts interest rates to the lower limit of 1% or 0.25%. The stock market usually bottoms out after the announcement of quantitative easing policies (it bottomed out 4 months after the announcement during the global financial crisis and 8 days after the announcement during the COVID-19 pandemic).

How big will quantitative easing be this time around?

During the global financial crisis and the COVID-19 pandemic, the size of the Federal Reserve's balance sheet expanded by 19% of the US GDP. Although 19% is probably just a coincidence, this means that the scale of quantitative easing could reach 5-6 trillion US dollars this time around.

The Federal Reserve balance sheet cycle

The size of the Federal Reserve's balance sheet fluctuates with the economic cycle — expanding during the crisis, shrinking from peak value when the economy recovers, until the next crisis hits, the Fed once again expands the balance sheet size. As the current quantitative austerity policy progresses, the size of the Federal Reserve's balance sheet has shrunk by about 25% from its 2022 peak, which is the biggest “contraction” in 20 years. If history is instructive, it is time for the Federal Reserve to once again implement quantitative easing.

Although quantitative easing has yet to be implemented, it is possible to take a historical look at how the market performed within six months after the Federal Reserve began expanding the balance sheet size in 2008 and 2019.

Key Observations

(1) Quantitative easing usually occurs at the same time as the Federal Reserve cuts interest rates.

(2) The macro background of the quantitative easing policy was risk aversion, poor stock market performance, widening credit spreads, and rising volatility in the stock market, bond, and foreign exchange markets.

(3) Long-term assets performed well, which is logical because the Federal Reserve buys bonds directly from the market.

(4) The stock market style favors growth stocks over value stocks. This may be because the market expects that quantitative easing will drive future economic growth recovery.

(5) Due to the background of risk aversion, the foreign exchange spread trading strategy did not perform well.

(6) As the spread between the US and Japan narrows and foreign exchange spread transactions are closed, the exchange rate of the US dollar against the yen fell.

(7) The commodity market showed mixed performance, with safe-haven assets such as gold performing well, while prices of commodities sensitive to economic growth, such as crude oil and copper, fell.