Global central banks are shrinking their balance sheets at a record pace, pulling $110 billion in liquidity out of markets each month. With the Fed, ECB, BoJ, and BoE all engaged in aggressive quantitative tightening, could this trigger a new wave of market volatility?
Why Central Banks Are Unloading $100 Billion Monthly?
Over the last two years, the world’s major central banks have been quietly and consistently tightening monetary policy—not through rate hikes alone, but through an aggressive reduction in their balance sheets. This process, known as quantitative tightening (QT), marks a dramatic shift from the expansionary policies seen during the pandemic era. And now, the scale and speed of this QT are starting to raise serious questions about the potential for renewed market volatility.
The Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BoJ), and Bank of England (BoE)—collectively referred to as the G4 central banks—have reduced their asset holdings by approximately $110 billion per month on average over the last six months. This coordinated pullback is nearly four times faster than the pace recorded in 2019, when only the Fed and the ECB were engaged in QT at a much slower rate of about $30 billion per month.
The current breakdown of monthly asset reductions among these central banks paints a clear picture of the aggressive stance:
- The ECB is leading the pack, shrinking its balance sheet by roughly $60 billion per month.
- The Fed follows with a reduction of about $35 billion per month.
- The BoJ is contributing to the tightening with a $10 billion monthly reduction.
- The BoE rounds out the group with a $5 billion monthly pullback.
The consistency of this pace over the past two years underscores a deliberate and sustained strategy to drain liquidity from the global financial system. This stands in stark contrast to the 2020–2021 period, when these same institutions injected record levels of liquidity in response to the COVID-19 crisis.
Historically, significant liquidity withdrawal by central banks has been associated with periods of heightened financial market volatility. With the current rate of balance sheet reduction now reaching record levels, concerns are mounting that markets could soon face similar turbulence. Investors and analysts alike are watching closely to see if this tightening wave could lead to corrections across equities, credit markets, or other risk assets.
As the liquidity that once fueled asset price appreciation is systematically removed, the potential for instability increases. Whether or not this results in a full-blown volatility spike remains to be seen—but the conditions are aligning in a way that warrants attention.
The bottom line: Global central banks are pulling back harder and faster than ever before. With over $100 billion in monthly asset reductions, the liquidity tide is clearly going out. And history suggests that when central banks tighten this aggressively, markets rarely stay calm for long.
Central banks around the world are rapidly shifting into easing mode. So far in 2025, there have already been 64 interest rate cuts globally—the highest year-to-date number since 2020, according to Bank of America. If this pace continues, 2025 could set a new all-time record for global rate reductions.
The European Central Bank (ECB) has led the charge, slashing interest rates four times this year.
Other major central banks are also on the easing path:
- The Bank of Canada, Bank of England, and Swiss National Bank have each cut rates twice.
- The Reserve Bank of New Zealand has reduced rates three times.
- The Reserve Bank of Australia has eased policy twice so far.
Amid this global wave of monetary easing, one major player stands apart: the Federal Reserve. The Fed is signaling a continued pause, choosing to hold interest rates steady for now despite growing global momentum toward looser financial conditions.
This divergence underscores a key tension in the global economy: while much of the world is shifting toward stimulus, the United States remains cautious. The implications could be wide-ranging—from capital flows and currency volatility to equity market performance.
As the rest of the world cuts, the Fed’s restraint could make the dollar stronger, pressure emerging markets, and further complicate the global financial outlook in the second half of 2025.
Disclaimer:
This article is for informational purposes only and should not be construed as financial or investment advice. Readers are advised to do their own research or consult a financial advisor before making any investment decisions.