Global Liquidity Crisis ?

Last week, the Federal Reserve decided to reduce the quantitative tightening and the Bank of Japan continues to support bond operations. According to certain parameters the excess liquidity has been declining since January 2025. This might be one of the factors to keep the bond yields higher despite having a good response to auctions.

Driven by the USA and now joined by more countries cuts in budgets and expenses have reduced the government circulation. Whether this liquidity segment gets further squeeze during the year or there might be some respite ahead is important.

Removing the excess liquidity from government and private circulation might also be the result of low confidence and high uncertainty about the future. Though it does not impact the economy and financial markets immediately it does slow the growth rate down. 

The critical state of the global economy with slowing growth and low confidence along with tight liquidity can result in a sharp downturn with a small trigger. Will the central banks and government step in prior to such a scenario or do we see the next Quantitative Easing cycle ahead?