Analysis of the Dominance of Federal Reserve Monetary Policy and U.S. Fiscal Policy over Global Liquidity and Asset Allocation Strategy

According to the latest market data, the current price of the S&P 500 index is $677.66, with a year-on-year growth rate of 12.13% [0]. Although the Federal Reserve has cut interest rates three consecutive times, the market liquidity condition has not improved as expected, which reflects the complexity of the policy transmission mechanism.

The chart shows that the year-on-year growth rate of the S&P 500 has recently maintained at 12-13%, but it is still lower than the typical level during the expansion period in the historical cycle. Since the start of the liquidity cycle in December 2022, the market has experienced a complex transition from extreme tightening to gradual easing.

: Changes in the balance of the U.S. Treasury General Account (TGA) have had a decisive impact on liquidity:

• February 2, 2025
  : TGA balance reached $818 billion, releasing liquidity to the market
• July 9, 2025
  : TGA balance dropped to $311.1 billion
• October 29, 2025
  : TGA balance surged to $983.9 billion, equivalent to withdrawing $672.8 billion from the market [1]

This sharp fluctuation directly led to tight liquidity in the U.S. repo market and a surge in the SOFR-EFFR spread.

Although the Federal Reserve announced on October 31, 2025, that it would stop Quantitative Tightening (QT) starting December 1 to maintain liquidity, the impact of fiscal policy was more significant:

• Overnight Reverse Repo Facility Balance
  : Dropped from approximately $2.5 trillion at the end of 2022 to $49 billion at the end of September 2025
• Bank Reserve Balance
  : Fell from $3.1-$3.4 trillion to $2.83 trillion on October 29 [1]

The disappearance of the liquidity buffer mechanism has greatly reduced the effectiveness of Federal Reserve policy.

Time Node	Policy Event	Liquidity Impact	Dominant Force
December 2022	Start of liquidity cycle	Fiscal expenditure-led	Fiscal policy
March 2023	Silicon Valley Bank crisis	Monetary policy response	Federal Reserve
September 2024	Federal Reserve starts cutting rates	Limited effect	Fiscal policy
December 2024	Third interest rate cut	Liquidity not improved	Fiscal policy

Traditionally, Bitcoin as a liquidity proxy variable can accurately reflect global liquidity conditions. However, in this cycle, Bitcoin price changes are completely divergent from the Federal Reserve’s rate-cutting cycle, confirming the dominant position of fiscal policy.

: In a liquidity environment dominated by fiscal policy, the following strategies should be adopted:

1. Increase allocation to money market funds
   : Relatively stable returns and strong liquidity
2. Increase allocation to short-term bond funds
   : Benefit from Federal Reserve rate cuts with low risk
3. Allocate to utility stocks
   : Obvious defensive characteristics and stable cash flow

Asset Class	Allocation Weight	Allocation Reason	Risk Level
Money market funds	25-30%	High liquidity, stable returns	Low
Short-term Treasury ETFs	20-25%	Benefit from rate cuts, low credit risk	Low
Utility stocks	15-20%	Strong defensiveness, stable dividends	Medium-low
Gold ETFs	10-15%	Inflation hedge, safe-haven property	Medium
High-quality blue-chip stocks	10-15%	Sound fundamentals, reasonable valuation	Medium-high

:

• Technology growth stocks
  : High valuation sensitivity, greatly affected by liquidity shocks
• Commodities
  : Demand side significantly affected by fiscal policy
• Emerging market assets
  : Under pressure in the environment of tight U.S. dollar liquidity

1. TGA account decline
   : It is expected that the TGA account will fall to the target level of $850 billion in the future
2. Federal Reserve stops QT
   : Maintain the stability of the System Open Market Account (SOMA) size
3. Normalization of fiscal expenditure
   : Expenditure resumes after the government reopens [1]

:

• Federal Reserve announces larger-than-expected balance sheet expansion
• New Federal Reserve Chair is more dovish than expected

:

• December FOMC is more hawkish than expected
• Non-farm payroll data is significantly lower than expected
• Bank of Japan’s interest rate hike triggers liquidity shock

:

• 60% allocated to money market funds and short-term bond funds
• 20% allocated to utilities and consumer staples
• 20% keep cash, waiting for opportunities brought by market fluctuations

• When the effect of fiscal policy weakens, gradually increase allocation to high-quality growth stocks
• Pay attention to clear signals of Federal Reserve policy shift
• Increase the proportion of cyclical assets at the right time

The current global liquidity environment is at a special historical node, where fiscal policy has surpassed the dominant position of traditional monetary policy. This shift in pattern requires investors to re-examine traditional asset allocation logic, while maintaining defensiveness, closely monitor investment opportunities from marginal policy changes.

It is recommended that investors adopt a strategy of ‘defense first, then offense’. Before the liquidity environment becomes clear, focus on stable allocation while maintaining sufficient flexibility to adjust the portfolio in a timely manner when policy shifts.

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[0] Gilin API Data - S&P 500 Real-time Quotes and Historical Data Analysis
[1] Sina Finance - “Causes and Outlook of the Tight U.S. Dollar Liquidity Situation”, December 10, 2025, https://finance.sina.com.cn/money/forex/2025-12-10/doc-inhahxmc2050154.shtml
[2] CICC Research Department - “Concerns Over AI Bubble Remain Unresolved; Liquidity is a Key Short-term Variable”, December 8, 2025, https://finance.sina.com.cn/stock/stockzmt/2025-12-08/doc-infzzuip4195739.shtml
[3] People’s Daily Online - “Federal Reserve Rate Cuts Hide Multiple Changes”, December 12, 2025, http://finance.people.com.cn/n1/2025/1212/c1004-40622915.html