In a dramatic turn for global financial markets, the U.S. Federal Reserve has reignited its quantitative easing (QE) program with $40 billion in monthly Treasury purchases, a move that comes amid persistent inflation, ballooning federal borrowing costs, and mounting political and market pressures. The decision, announced by Fed Chair Jerome Powell on December 10, 2025, marks a significant reversal after years of balance-sheet tightening and has sent ripples through currency, bond, and commodity markets worldwide.
The timing of the Fed’s pivot could hardly be more sensitive. After allowing about $2.4 trillion in assets to roll off its balance sheet since 2022—shrinking from a peak of $8.93 trillion in June 2022 to $6.54 trillion by December 2025—the central bank now contends that reserves are no longer "ample" enough to ensure smooth functioning of short-term interest rates. Inflation, meanwhile, remains stubbornly near 3 percent, well above the Fed’s 2 percent target. At the same time, federal borrowing costs have soared past $1 trillion annually, further complicating the policy calculus.
"The central bank must resume asset purchases to maintain what officials call ‘ample reserves,’" Powell explained, emphasizing the need for flexibility and stability in the face of tightening market liquidity. According to The Economic Times, the new $40 billion Treasury purchase signals an end to the tightening cycle and a return to balance-sheet expansion, despite inflation still running hot.
The mechanics of QE are straightforward, but their implications are anything but. By electronically creating new money and buying Treasury bonds, the Fed injects liquidity into the financial system, increases bank reserves, and pushes down borrowing costs. This typically supports stock markets—especially growth and tech stocks—by lowering bond yields and encouraging risk-taking. For the U.S. Treasury, QE also helps by reducing yields on short-term debt, thus lowering federal borrowing costs at a time when annual interest payments have surpassed the $1 trillion mark.
Yet, as The Economic Times notes, this policy is not without controversy. Critics question whether a balance sheet of this size can truly be considered insufficient, especially given that it has been growing at an estimated 8 percent annualized pace since 2019, with inflation averaging about 4 percent over the same period. The tension between supporting markets and controlling inflation is palpable, and the stakes are high. Renewed QE could risk prolonging inflation if excess liquidity fuels demand, potentially delaying a return to the Fed’s target.
Behind the scenes, the Fed’s move reflects internal divisions. Some policymakers favored aggressive rate cuts, while others preferred no change at all. Restarting QE offers a compromise: it loosens financial conditions without immediately slashing the federal funds rate. Political pressure is also a factor. President Trump has publicly urged faster rate cuts, and expanding the balance sheet allows the Fed to ease policy while avoiding the appearance of yielding directly on rates. Additionally, as interest rates climbed above 5 percent, the Fed faced mounting operating losses from paying hundreds of billions of dollars annually in interest on bank reserves—another incentive to lower rates through QE.
The impact of the Fed’s pivot is already being felt in the currency markets. On December 19, 2025, the dollar index (DXY) climbed to a one-week high, up by 0.18 percent, buoyed by yen weakness and upbeat comments from New York Fed President John Williams. Williams remarked that some of the data is "pretty encouraging" and that he sees "no sign of a sharp deterioration in the jobs data," projecting U.S. GDP growth of 1.5 to 1.75 percent for 2025. However, the dollar’s rally was tempered by concerns that President Trump intends to appoint a dovish Fed Chair in early 2026—a move seen as bearish for the currency. According to Barchart, National Economic Council Director Kevin Hassett is widely considered the leading candidate for the position, and markets are already discounting a 20 percent chance of a 25 basis point rate cut at the January 27-28, 2026 FOMC meeting.
Meanwhile, the yen tumbled to a four-week low against the dollar, despite the Bank of Japan (BOJ) raising interest rates by 25 basis points to 0.75 percent and Japanese government bond yields surging to a 26-year high of 2.025 percent. The BOJ, under Governor Ueda, signaled caution about further rate hikes, even as Japan’s November 2025 national CPI rose 2.9 percent year-over-year and core CPI (excluding fresh food and energy) increased 3.0 percent.
Market reactions have been complex. While the dollar has found support from upbeat Fed commentary and yen weakness, it has also faced headwinds from an increase in system liquidity and uncertainty over future Fed leadership. The University of Michigan’s U.S. December consumer sentiment index was unexpectedly revised lower, and inflation expectations for the coming year ticked up to 4.2 percent. At the same time, U.S. November existing home sales rose 0.5 percent month-over-month to a nine-month high, though still below expectations.
Precious metals markets have also responded to the shifting landscape. On December 19, 2025, gold and silver prices rose modestly, supported by expectations of easier Fed monetary policy in 2026 and ongoing geopolitical risks in Ukraine, the Middle East, and Venezuela. Despite the dollar’s strength and higher global bond yields—both typically negative for precious metals—safe-haven demand has persisted. Notably, China’s central bank (PBOC) increased its gold reserves by 30,000 ounces in November 2025, marking the thirteenth consecutive month of accumulation and pushing total reserves to 74.1 million troy ounces, as reported by Barchart. The World Gold Council also noted that global central banks purchased 220 metric tons of gold in the third quarter, up 28 percent from the previous quarter.
Silver has found support from concerns about tight Chinese inventories, with stocks in Shanghai Futures Exchange warehouses falling to the lowest level in a decade. Meanwhile, long holdings in silver ETFs rebounded to a nearly three-and-a-half-year high, even as overall ETF holdings have fluctuated since peaking in October.
The Fed’s renewed QE program has thus set off a chain reaction across asset classes, currencies, and commodities, with investors and policymakers alike watching closely for signs of longer-term consequences. While short-term market rallies are possible, the risk of asset bubbles and delayed inflation control remains a pressing concern. Whether this strategy stabilizes markets or fuels another inflation problem will become clearer in 2026, but for now, the Fed’s return to quantitative easing underscores a central reality: flexibility and financial stability are once again at the top of the agenda, even as the battle against inflation is far from over.
