When Quantitative Tightening Ends

When the Fed Will Stop Shrinking Its Balance Sheet

The Federal Reserve is approaching the end of quantitative tightening (QT). Fed Chair Jerome Powell recently announced they plan to stop balance sheet runoff when reserves reach levels "somewhat above" what they consider adequate—and that point may arrive "in coming months."

How the Fed's Balance Sheet Works

The Fed's balance sheet is like a brokerage account, but with one critical difference: they create money from nothing to buy assets. When the balance sheet rises, they're printing money and buying assets (quantitative easing). When it falls, they're letting assets mature or selling them, destroying that money in the process (quantitative tightening).

Since April 2022, the Fed has been shrinking its balance sheet in a smooth, controlled decline—sometimes letting bonds mature, sometimes selling them, sometimes even buying a few to prevent too rapid a drop.

Why Liquidity Matters

When the Fed buys assets, it injects liquidity into the financial system. When it sells or lets assets expire, it drains liquidity. This liquidity is the lifeblood of financial institutions.

Too little liquidity, and banks can't access the overnight cash they need to operate. In September 2019, this nearly happened—the repo market saw interest rates spike because liquidity had dried up. The Fed had to intervene to prevent bank failures.

The Two Repo Facilities

Regular Repo Facility: Banks use this when they need emergency cash from the Fed because they can't get it from each other. After years of zero usage, it's showing activity again—a warning sign that liquidity is tightening.

Reverse Repo Facility: The opposite problem—a parking lot for excess cash when the system is flooded with liquidity. This peaked at $2.5 trillion in December 2022 after massive pandemic money printing. It's now essentially empty, confirming that excess liquidity has been drained.

Bank Reserves: The Key Metric

The Fed is watching bank reserves, currently around $3.2 trillion. Before the reverse repo facility emptied, the Fed considered both reserves and reverse repo balances together as available liquidity. Now, with reverse repo at zero, they're focused solely on reserves.

This $3.2 trillion represents their level—not too much, not too little. Any significant drop risks triggering liquidity problems like those seen in 2019.

The Path Forward

QT has successfully drained the excess liquidity created during the pandemic. The reverse repo facility reaching zero and the regular repo facility showing renewed usage both signal the job is nearly complete.

Powell's announcement means the Fed will likely halt balance sheet reduction within months, stabilizing reserves at current levels rather than risking a liquidity crisis.

The Long-Term Outlook

While QT is ending, the ultimate trajectory points toward renewed quantitative easing. The government's massive borrowing needs won't be satisfied through gimmicks or policy tweaks. Eventually, the Fed will need to restart the money printer.

This means the years ahead likely hold higher prices, higher inflation, higher interest rates, and higher asset prices. When everything inflates together, you're not measuring bubbles—you're measuring the declining value of the dollar itself.