Global Central Banks Set to Drain $1tn in Liquidity Despite Fed Easing

Our analysis examines the policies of the major central banks. This includes the Federal Reserve, European Central Bank, Bank of Japan and Bank of England alongside the People’s Bank of China. We focused on balance sheet operations and net quantitative easing (QE) or tightening (QT) to assess global liquidity conditions this year.

The conclusion is stark. While the headlines suggest easing, the balance sheets suggest a drought.

European Central Bank

The European Central Bank has carried out two separate balance sheet operations over the last few years. These are the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP).

The ECB began its APP in 2014. It covered four main components, including corporate sector purchases, public sector debt, asset-backed securities and covered bonds. Most of the quantitative easing was carried out through purchases under the public sector program.

The ECB effectively stopped QE in July 2022 with no net purchases. It kicked off QT in March 2023 when it only partially reinvested redemptions.

The ECB publishes expected monthly redemptions under the APP. These are projected to average around €26bn ($27.3bn) per month in 2026.

In addition to the APP, the ECB also conducted the PEPP to cover private and public sector securities from March 2020 to March 2022.

The size of the tightening from the PEPP is expected to be €15bn ($15.7bn) a month in 2026. Combined with the APP redemptions, this represents a significant monthly withdrawal of euro liquidity from the system.

Federal Reserve

As part of its balance sheet reduction, the Federal Reserve carried out quantitative tightening from June 2022 to December 2025. This shrank its holdings by more than $2tn.

However, the Fed announced reserve management purchases (RMP) at its latest meeting. Policymakers judged that reserve levels had fallen to the lower end of their targeted "ample" range. Under the FOMC guidance, the Federal Reserve Bank of New York will purchase Treasury bills or Treasury securities with remaining maturities of three years or less.

The program began in December. It was initially sized at around $40bn and will be reviewed on a monthly basis.

Although part of the System Open Market Account portfolio, RMPs are distinct from quantitative easing. They are intended to support long-term growth in demand for Federal Reserve liabilities as well as seasonal fluctuations. According to the FOMC minutes, policymakers emphasized that RMPs would be made solely to ensure interest-rate control and smooth market functioning. They explicitly stated it had "no implications for the stance of monetary policy."

Bank of Japan

The Bank of Japan’s quantitative easing program involved multiple asset purchases. This included Japanese government bonds, which account for about 80% of its balance sheet. It also holds loans at roughly 12% and equity exchange-traded funds and Japanese real estate investment trusts at around 5%. So far, quantitative tightening has largely utilized the first two categories.

The BoJ announced a plan for the reduction of purchasing government bonds in its June 2025 meeting. The goal is to reach about ¥2tn ($13.8bn) in January-March 2027. Asset purchases are scheduled to be reduced from ¥4.1tn ($28.4bn) by roughly ¥400bn ($2.7bn) per quarter through January–March 2026. The pace will then slow to cuts of about ¥200bn ($1.3bn) per quarter from April–June 2026 onward.

It is a partial form of QT. The BoJ continues to buy bonds but is gradually reducing purchase amounts. Meanwhile, a larger share of outstanding bonds matures. This allows the balance sheet to shrink over time.

This aligns with the BoJ's aim to conduct QT in a "predictable manner" while allowing enough flexibility to support stability in the JGB markets.

BoJ data suggest that recent balance sheet changes have been driven mainly by declines in government bond holdings and loans. Given the relatively small share of loans on its books, future reductions are likely to be led primarily by maturing government securities. Sandmark analysis suggests that the BoJ will shrink its balance sheet at an average pace of about $23bn a month in the first quarter of 2026 before the pace eases slightly thereafter.

Bank of England

The Bank of England engaged in QE via its Asset Purchase Facility (APF) from 2008 to 2022. This included support during the pandemic. A total of £875bn ($1.1tn) was bought under the program.

The reduction of the balance sheet is conducted via a mix of bond sales and allowing existing bonds to mature.

The decision on the size of the QT is taken by the Monetary Policy Committee (MPC) each autumn. In September 2022, the MPC voted to reduce the stock of gilts held in the APF by £80bn ($100bn) within a year. It followed this with £80bn in 2023, £100bn ($125bn) in 2024 and £70bn ($88bn) in 2025. Total holdings have now been reduced to below £500bn ($628bn).

The MPC’s decision to reduce the balance sheet by £70bn ($88bn) implies an average monthly reduction of at least £5.8bn ($7.3bn) between January and September 2026.

People’s Bank of China

The People’s Bank of China does not engage in quantitative easing or tightening. Using the PBoC balance sheet as a policy tool has long been considered taboo in Beijing. The PBoC did engage in balance sheet policy back in 2015 to spur the property sector, but has since been reluctant to engage in these policies. This reluctance persisted even during the pandemic.

Instead of broad monetary easing, China has relied on short- and medium-term yuan injections. The central bank has provided liquidity on a net basis for much of the past year.

Like others, the PBoC has multiple monetary policy tools at its disposal. These include open market operations, standing lending facilities, macro-prudential tools, various credit policies and a managed floating currency regime.

Liquidity in 2026

The combined picture is negative. Despite a potentially looser monetary stance and liquidity injections through the Fed’s reserve management purchases, the other major central banks are set to continue reducing their balance sheets. This is part of ongoing quantitative tightening.

As a result, global liquidity is expected to tighten by around $1tn in 2026 as the major central banks continue to shrink their balance sheets.

This has implications for asset markets. Quantitative tightening also took place in 2025, yet many asset classes performed well. US equities delivered returns above the historical averages, while European and Japanese stocks outperformed further. Commodities such as gold, platinum and silver also saw strong gains. Bitcoin lagged behind and posted a negative return of about 6% for the year.

During periods of quantitative tightening or monetary tightening, cryptocurrencies empirically behave like high-beta risk assets. Returns tend to decline, and volatility rises in tandem with equities and high-yield credit. Conversely, assets associated with flight-to-quality or tighter financial conditions, such as the US dollar and short-duration bonds, perform relatively better.

Cross-asset studies show stronger co-movement and volatility spillovers between crypto and equities in tightening regimes. Correlations weaken or become unstable during easing phases. Spillover analyses further indicate that crypto’s sensitivity to monetary policy shocks is often comparable to or greater than that of equities. This is particularly true during stress episodes, whereas assets like gold frequently display different or opposite responses.