Rising and Falling in Silence: The Fed’s Quiet Quantitative Easing Under Worsh Regime

Despite a major expansion in absolute size, the share of U.S. Treasuries held by the Federal Reserve as a proportion of all outstanding U.S. Treasuries is actually lower than levels from five years ago and even ten years ago.

The Federal Reserve’s balance sheet size has ballooned from less than $900 billion in 2007 to roughly $6.7 trillion in 2026. This shift seems to suggest that the central bank has an absolute dominant role in the U.S. Treasury market. However, a set of data largely overlooked by the market reveals a counterintuitive fact: although the absolute scale has expanded significantly, the proportion of U.S. Treasuries held by the Federal Reserve relative to all outstanding U.S. Treasuries is actually lower than levels from five years ago, or even ten years ago. Behind this change lie a transition in the Federal Reserve’s balance sheet policy, as well as a “triple dilemma” response strategy led by the newly appointed chair, Waller.

Absolute scale versus relative share divergence

After the Federal Reserve’s balance sheet reached an all-time peak of about $8.9 trillion in June 2022, it went through more than three years of quantitative tightening (QT). By March 2026, it had fallen to about $6.657 trillion. However, this “rigid” contraction process was suddenly halted in December 2025—after warning signals emerged of reserve shortages in the money markets. The Federal Reserve announced the launch of the “Reserve Management Purchase program” (RMP), purchasing short-term Treasuries to inject liquidity back into the system.

For the week of June 24, 2026, the Federal Reserve balance sheet was about $6.79 trillion, up by $7.96 billion week-over-week. Within that, its U.S. Treasury holdings were $4.4879 trillion, while its holdings of mortgage-backed securities (MBS) fell to $1.9634 trillion. This indicates that the Fed’s “balance sheet reduction” is far from the expected target—and in fact, an effective reversal has already occurred.

Even though the absolute size of the Fed’s Treasury holdings remains as high as $4.38 trillion, when placed against the backdrop of the total size of the U.S. Treasury market (about $39 trillion), its relative share has fallen from an all-time high of about 19% at the end of 2021 to 11.2%. This is roughly comparable to the historical level of about 10% in 2002. That means that after two decades of QE and QT cycles, the Fed has not expanded its “relative pace” in the U.S. Treasury market.

The core reason for the decline in share is that the growth rate of total U.S. Treasury supply is far outpacing the pace at which the Fed is adding to its holdings. From 2021 to 2026, U.S. national debt surged from about $29 trillion to $39 trillion, up 34.5%, while the Fed’s Treasury holdings fell only from about $5.5 trillion to $4.38 trillion, a decline of 20.4%. This leads to a significant dilution of the relative share. This “passive dilution” provides a plausible basis for future rationalization of the Fed’s potential renewed expansion.

In sharp contrast to its Treasury holdings, the Fed’s MBS holdings have dropped from about $2.7 trillion in early 2022 to $1.96 trillion as of June 2026, and they are still falling. The Fed has clearly stated that it will not make new purchases in the MBS market, and that all maturing principal will be rolled into Treasuries. This means the Fed is completing a strategic exit from the housing finance market while reallocating resources back into the Treasury market—highly consistent with Waller’s concept of “returning to the Fed’s core functions.”

“Triple dilemma” and Waller’s policy choices

In January 2026, Federal Reserve economists published a research report that systematically outlined the “triple dilemma” faced by central bank balance sheets: among three goals—keeping a small balance sheet size, stabilizing short-term interest rate volatility, and limiting market intervention—the central bank can achieve only two at the same time. Before that, in December 2025, pressure signals emerged in the U.S. money markets, forcing the Fed to abandon the “small balance sheet” goal and shift to a combination of “low short-term rate volatility” and “limited market intervention.”

Before Waller took office, he had long criticized excessive central bank intervention in markets and advocated for a smaller balance sheet. After becoming Fed chair, he quickly established five special working groups covering areas such as communication methods, the balance sheet, data sources, productivity and employment, and the inflation framework. On balance sheet policy, Waller explicitly said, “We spent about 18 years to build such a large balance sheet, and it will definitely take more than 18 weeks to reduce it to a reasonable size.” This indicates that the Fed’s policy focus is shifting from overall quantity reduction to structural adjustment.

A strategist at the Canadian Imperial Bank of Commerce expects that further QT plans will progress slowly: a方案 (plan) will be released by year-end and remain in the public comment period until the second quarter of 2027, with the actual balance sheet reduction starting in the fourth quarter of 2027. Barclays, meanwhile, warned that reserve scarcity could eventually lead to a breakdown in the repo market, meaning any attempt at rapid balance sheet reduction would face systemic risks.

This means that in the foreseeable future, the Fed will keep its total balance sheet size in the current range of about $6.7 trillion to $6.8 trillion, but its internal structure will undergo profound change.

Short-dated substitution strategy

The Fed’s current Treasury holdings structure has a significant “duration over-allocation” problem. According to a Barclays research report, the weighted-average maturity of the Fed’s Treasury portfolio is about 9 years, far above the 3-year level before the global financial crisis. The share of Treasuries with maturities of 10 years or longer has risen to 40%, while short-term Treasuries (T-bills) account for only 7% of the Treasury portfolio—far below the pre-financial-crisis level of 36%.

Federal Reserve governor Christopher Waller said this structure is not ideal and recommended a “maturity matching strategy”—the Fed’s holdings by maturity should match the maturity distribution of the market’s outstanding Treasuries to avoid distorting specific segments of the yield curve. Under this standard, the Fed should raise its short-dated Treasury holdings share from the current roughly 7% to about 20%.

To normalize the maturity structure, the Fed is executing “swap short for long” operations through two routes. First is the reinvestment route: all maturing MBS principal is reinvested into short-term Treasuries. The New York Fed’s operation plan shows that from mid-June to mid-July 2026, the reinvestment purchase scale is about $16.5 billion. Second is the reserve management purchase route: since RMP began in December 2025, the Fed has purchased short-term Treasuries every month. The initial scale was $40 billion, falling to $25 billion in April 2026 and further down to $10 billion in May. By July 2026, cumulative purchases total about $310 billion in short-term Treasuries.

Roberto Perli, an official in charge of monetary policy execution at the New York Fed, said the reserve management purchase program is “not carried out on a predetermined path, and the operating unit may increase or decrease the purchase size for any given month based on money-market conditions.” This means that the short-term Treasury purchase size is highly flexible and can be dynamically adjusted according to market liquidity conditions.

The essence of the “swap short for long” strategy is to transfer the enormous maturity risk from the Fed’s balance sheet to the private market. Barclays reported that if, over the next five years, the Fed increases its T-bills holdings from about $67k to about $89k (representing 60% of the Treasury portfolio), the portfolio duration would fall from 9 years to 4 years, approaching the pre-financial-crisis level.

This structural shift will lead to a repricing of the maturity premium. Because the private market needs to absorb the long Treasuries that the Fed is effectively selling off (passive de-risking via non-reinvestment/rolling off), the maturity premium on long-term Treasuries will be directly pushed higher. Structural upward pressure on long-end yields could prompt the Fed to turn to rate cuts earlier when economic growth slows—what some market participants view as a “Waller scheme”: by adjusting the portfolio structure, it pressures monetary policy to become looser.

The logic of implicit quantitative easing: how can it be both small and big

Waller’s core policy paradox is: how to adhere to the principle of “minimizing market intervention” while avoiding uncontrolled short-term rate volatility and instability in the Treasury market?

The Fed’s response strategy is to shift policy targets from “absolute scale” to “relative share.” If the Fed anchors its Treasury holdings at a fixed proportion of total outstanding Treasuries (for example, 11%–15%), then as total Treasury supply keeps growing (with an annual increment of about $66.57k to $67.9k), the Fed’s absolute holdings would be passively expanded. This expansion is not justified as a stimulus to the economy, but rather as a reason to maintain market neutrality—allowing Waller to claim that the Fed has not increased its relative intervention, but has only followed the pace of fiscal expansion passively.

The RMP launched by the Fed in December 2025 is an early implementation of this strategy. Its official wording is “maintaining an adequate level of reserves,” rather than “quantitative easing,” but its real effect is to inject liquidity into the system and expand the balance sheet. In this way, the anchoring of relative share and the redefinition of market intervention are achieved.

Another potential cooperative path between the Fed and the Treasury is easing bank capital regulatory requirements, freeing up the banking system’s capacity to absorb Treasuries. In 2020–2021, banks’ balance sheets expanded significantly due to regulatory exemptions, absorbing enormous volumes of Treasury supply. If Waller pushes similar deregulation measures, banks would be able to take on the long Treasuries that the Fed reduces, preventing excessive upward pressure on long-end yields.

The Fed’s new paradigm and the market pricing logic reshaping

Under Waller’s leadership, the Fed is carrying out a policy operation of “cutting visibility while expanding in effect.” For market participants, this shift in pricing paradigm implies:

• Short-dated Treasuries will face sustained buying pressure. Continued RMP purchases (even though they have fallen to $10 billion per month, they can be increased at any time as needed) will provide structural support for short-term Treasuries, suppressing yields on the short end.

• Long-end rates will face structural upward pressure. As the Fed gradually exits the long-duration Treasury market, it transfers duration risk to the private sector, which may keep term premia on 10-year and longer Treasuries elevated.

• A steeper yield curve is likely. Short-term rates will face downward pressure due to Fed purchases, while long-term rates may rise due to changes in the supply structure. A steeper curve could become the new normal. This trend has already been seen after the June 2026 FOMC meeting: the 2-year yield surged by 13.9 basis points to 4.184%, while the 30-year yield fell slightly by 1.4 basis points; after the curve flattened, it faced renewed pressure toward steepening.

The “Fed bearish option” hasn’t disappeared—it has simply changed the way it is implemented. While Waller shut down the “front-page” signaling mode of forward guidance, he preserved the capability for implicit intervention through balance sheet structural adjustments.

For investors, understanding the Fed’s paradigm shift from “quantity easing” to “structural control” is more important than focusing on monthly fluctuations in balance sheet size. With Treasury supply continuing to expand and the Fed passively adding to holdings under the rationale of “maintaining share,” the pricing logic of the U.S. Treasury market is undergoing its deepest transformation since 2008.