Recently, the news of the Fed injecting 6.8 billion in Liquidity has been everywhere, with two opposing voices in the financial circle heating up the debate. On one side, there are cheers of "the market rescue is here," feeling that this is a sign of easing policies; on the other side, there are concerns of "inflation is coming again." However, very few people truly understand the logic behind this operation.

First, let's state a key fact: this 6.8 billion injection is not a quantitative easing (QE) at all, but rather a defensive measure by the Fed. The purpose is very clear - to prevent a repeat of the liquidity crisis of 2019.

How to understand it? Let's start with the numbers. Since the balance sheet reduction began in June 2022, the Fed's asset size has shrunk by more than 30%. By the end of last year, the reserve balance had fallen below $3 trillion for 8 consecutive weeks, a level that had previously posed a risk in 2019. The liquidity storm that year was caused by reserves dropping to inadequate levels, leading to sudden tightness in the funding environment.

The current situation is somewhat similar. Year-end settlements and regulatory requirements may lead banks to raise financing costs, and overnight repo rates may rise accordingly, putting pressure on the funding environment. The Fed's move to inject liquidity is essentially a precautionary measure.

On the contrary, if this is really a signal of massive liquidity injection, why would the Fed still synchronize balance sheet reduction? It's contradictory, right? Therefore, rather than interpreting it as the beginning of a stimulus cycle, it is better to understand it as the Fed walking a tightrope—maintaining the overall direction of tightening while ensuring that there are no short-term liquidity risks.