Deutsche Bank Predicts Fed Will Restart Balance Sheet Expansion in Early 2026

Deutsche Bank forecasts Fed balance sheet growth in Q1 2026 amid slowing U.S. economic activity.

The Fed’s balance sheet reduction ends December 1, after shrinking from $9 trillion to $6.6 trillion.

Renewed asset purchases could inject liquidity, influencing equities, bonds, and digital assets globally.

Deutsche Bank expects the U.S. Federal Reserve to begin expanding its balance sheet again in the first quarter of 2026, a shift toward looser monetary policy. According to Walter Bloomberg, the bank said in a report on November 7 that slowing economic conditions and tightening liquidity pressures could push the Fed to act sooner than expected

This would effectively restart quantitative easing (QE), a policy involving large-scale purchases of government and mortgage securities to boost liquidity and stabilize markets. The move would come after nearly three years of balance sheet reduction, signaling a potential turn in the Fed’s approach to market support.

Fed Ends Shrinkage of Bond Holdings

The timing follows the Fed’s recent decision to end its quantitative tightening process on December 1. The central bank had been allowing bonds acquired during the pandemic to mature without reinvestment since 2022. That program reduced its balance sheet from a $9 trillion peak to about $6.6 trillion

However, recent data showing rising money market rates and heavier use of liquidity facilities led the Fed to conclude it had tightened enough. The decision effectively pauses further reductions, setting the stage for possible expansion in early 2026.

Deutsche Bank Cites Liquidity And Growth Concerns

Deutsche Bank’s analysis links the potential policy reversal to growing worries about slowing U.S. growth and funding strains in financial markets. The bank noted that lower liquidity could threaten banking system stability and complicate government financing

These risks, it said, increase the likelihood of renewed asset purchases to maintain smooth market function. Expanding the balance sheet would involve buying Treasury and mortgage-backed securities, injecting cash into the banking system. Historically, such actions have reduced borrowing costs and supported asset prices across markets.

Implications For Broader Financial Markets

A new round of balance sheet expansion could have wide effects on asset classes, including equities, bonds, and digital assets. Previous cycles of quantitative easing, such as during 2020 and 2021, coincided with surging valuations in risk assets as liquidity surged across the economy. Notably, the Fed’s 2020 expansion more than doubled its holdings within months to support financial stability during the COVID-19 crisis

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