Decoding the global liquidity cycle: Where are we?
Author:hoeem
Compiled by: Saoirse, Foresight News
Wealth inherited from generation to generation is often born in the transition from a tightening cycle to an easing phase. Therefore, clarifying one's position in the liquidity cycle is the key to accurately deploying assets. Which stage are we in now? Let me explain in detail...
Why You Must Pay Attention to the Liquidity Cycle (Even If You Hate Macroeconomics)
Central bank liquidity is like the oil that lubricates the engine of the global economy:
Too much pumping can cause the market to "overdrive," while too much withdrawal can cause a "piston jam," like your well-dressed date suddenly walking away from you. The point is: if you can keep up with the pace of liquidity, you can predict bubbles and crashes in advance.
Four Phases of Mobility 2020-2025
1. Surge phase (2020-2021)
The central bank is pumping water like a fire hose at full capacity: zero interest rates are implemented, the scale of quantitative easing (QE) is at a record high, and $16 trillion in fiscal relief is poured into the market.
For context, global money supply (M2) is growing faster than at any time since World War II.
2. Exhaustion phase (2021-2022)
Interest rates soared 500 basis points, quantitative tightening (QT) was initiated, and crisis rescue programs expired.
To put it in perspective, in 2022 the bond market experienced its biggest drop in history (approximately -17%).
3. Stable stage (2022-2024)
The policy remains tight and there are no new moves.
Policymakers are keeping existing policies in place to keep inflation in check.
4. Initial transition phase (2024-2025)
The world has begun to cut interest rates and relax restrictions, and although interest rates are still relatively high, a downward trend has begun.
Current situation in mid-2025: We are still on the stabilization phase with one foot, and taking the first step towards the initial turning phase with the other foot. Interest rates are high and quantitative tightening is still ongoing, but unless a new shock pulls us back into the surge mode, the next step will most likely continue to be easing.
For more details, please see the following "Traffic Light Quick Reference"...
Yes, I asked GPT to help me make a cool table! The following table will give you a clear picture of the situation in the three key years of 2017, 2021 and 2025:
A quick guide to the twelve major liquidity lever traffic lights
? Not activated ? Slightly activated ? Strongly activated
? Which is the master switch that activates the other 11 levers?
Step by step disassembly
In terms of interest rate cuts - the Federal Reserve raised interest rates in 2017, and there was almost no easing policy in the world; in 2021, the world urgently cut interest rates to near zero; in 2025, in order to maintain credibility in anti-inflation, interest rates remained high, but the United States and core European countries have planned a small interest rate cut for the first time at the end of 2025.
Quantitative Easing/Tightening (QE/QT) - In 2017, the Fed was shrinking its balance sheet while other major central banks were buying bonds; in 2020-2021, record quantitative easing policies were introduced around the world; by 2025, the policy stance reversed, the Fed continued to implement quantitative tightening, the Bank of Japan was still buying bonds without restrictions, and China was selectively injecting liquidity.
In simple terms: quantitative easing is like giving the economy a "blood transfusion", while quantitative tightening is like "slowly drawing blood".
You have to know when we are going into quantitative tightening or quantitative easing and where we are in the liquidity cycle…
2025 Mid-Term Status Dashboard
- In terms of interest rate cuts: the policy interest rate remains high; if progress goes smoothly, the first interest rate cut may occur in the fourth quarter of 2025.
- Quantitative Easing/Tightening (QE/QT): Quantitative Tightening (QT) is still ongoing, and no new quantitative easing (QE) policy has been introduced yet, but early stimulus signals have emerged.
Signals that need attention
Signal 1: Inflation falls to 2% and policymakers declare risks balanced
- Observation points: The Fed or ECB statement clearly turns to neutral wording
- Key significance: Clearing the last public opinion obstacle for interest rate cuts
Signal 2: Quantitative Tightening (QT) pause (capped at 0 or 100% reinvestment)
- Key points to watch: The Federal Open Market Committee (FOMC) or the European Central Bank announces full reinvestment of maturing bonds
- Key significance: Reduce the balance sheet to a neutral state and increase market liquidity reserves
Signal 3: The three-month forward rate agreement-overnight index swap spread (FRA-OIS) exceeds 25 basis points or the repo rate suddenly spikes
Observation points: The three-month FRA-OIS spread (Note: the difference between the forward rate agreement (FRA) rate and the overnight index swap (OIS) rate is an important indicator of credit risk and liquidity risk in the financial market.) or the general collateral (GC) repo rate jumped to around 25 basis points
- Key significance: It indicates dollar funding pressure, which usually forces the central bank to provide liquidity support
Signal 4: The People’s Bank of China (PBoC) cut the reserve requirement ratio (RRR) by 25 basis points
- Observation points: The national deposit reserve ratio has dropped to below 6.35%
- Key significance: Injecting 400 billion yuan of base currency often becomes the first domino of easing policies in emerging markets
In summary…
We are not at the surge stage yet.
Therefore, until a large amount of leverage turns green, the market will continue to experience repeated fluctuations in risk appetite and will not truly enter the frenzy stage.
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