Bank of America Warning: The Fed Will Inject $45 Billion per Month for Liquidity Next Year

Bank of America predicts that the Federal Reserve will begin purchasing approximately $45 billion in short-term Treasury bonds each month starting in January 2026, in response to the recent sharp decline in reserves. Since halting quantitative tightening (QT) on December 1, the Fed’s reserves have dropped to $2.86 trillion, accounting for only 9.2% of GDP—a multi-year low. The FOMC is scheduled to meet on December 9-10, and the market expects a 25 basis point rate cut.

Reserve Crisis Forces Policy Shift

Bank of America’s analysis points out that the Fed’s reserve level falling to $2.86 trillion is not a healthy signal. At the peak of the pandemic in 2020, the Fed’s reserves reached a historic high of nearly $5 trillion, but with the continued implementation of QT, reserves have steadily shrunk. When the reserve-to-GDP ratio drops below 10%, the banking system may face liquidity stress—precisely the threshold at which the Fed must act.

The predicted monthly purchase scale of $45 billion is significant. On an annual basis, this means the Fed would purchase about $540 billion in Treasuries, effectively restarting a moderate round of quantitative easing (QE). While this is less than the $120 billion per month peak in 2020, for a market where QT has ceased, it is a clear signal of a policy reversal.

The timing of this policy pivot is noteworthy. The Fed launched QT in June 2022 to tighten monetary conditions and combat inflation. However, reserves have declined faster than expected, forcing the Fed to consider injecting liquidity even before inflation has fully returned to the 2% target. Bank of America’s forecast essentially reflects the Fed’s dilemma: needing to control inflation while ensuring the financial system does not experience a crisis due to insufficient liquidity.

Crypto Market Resonates with Traditional Finance

Experts in the cryptocurrency sector have shown strong interest in Bank of America’s prediction. Liquidity is one of the most sensitive indicators for the crypto market; the Fed’s resumption of bond purchases means an increase in dollar supply, which usually lifts the prices of risk assets—including Bitcoin and Ethereum. During the Fed’s unlimited QE in 2020, Bitcoin soared from $3,800 to $69,000, a correlation repeatedly confirmed by the market.

However, traditional institutions like Vanguard are more cautious, believing that future buying may be at a smaller scale. This divergence stems from different interpretations of the Fed’s actions: Bank of America sees it as proactive liquidity management, while Vanguard may view it as a passive technical adjustment. In any case, the FOMC meeting on December 9-10 and Powell’s latest statements will provide the market with clearer guidance.

Optimistic Tone in 2026 Economic Forecast

(Source: BofA)

Candice Browning, Head of Global Research at Bank of America, expressed optimism about the 2026 economic outlook. She noted that despite market volatility concerns, the BofA team expects GDP growth in both the US and China to exceed market consensus. Senior US economist Aditya Bhave estimates Q4 2026 GDP growth at 2.4% quarter-over-quarter, driven mainly by increased corporate investment after the restoration of Tax Cuts and Jobs Act incentives, as well as the lagged effects of Fed rate cuts.

Regarding AI investment, Bank of America believes fears of an imminent bubble are exaggerated, and expects AI investment to continue robust growth in 2026. This optimistic outlook aligns with the Fed’s planned $45 billion monthly bond purchases—ample liquidity will support technological innovation and capital expenditures.

Savita Subramanian, Head of US Equity Strategy, forecasts S&P 500 earnings per share to grow by 14%, with a year-end target of 7,100 points. Meanwhile, Mark Cabana, Head of US Rate Strategy, expects the 10-year Treasury yield to reach 4% to 4.25% by the end of 2026, with downside risk. This suggests the Fed’s bond purchases could suppress long-term rates, creating a favorable environment for economic growth.