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.

Not All Money Printing is Created Equal

Unlike historical hyperinflation where governments physically printed currency, US dollars are loaned into existence through the banking system. When you deposit $10,000, banks keep only a fraction and lend out the rest (say $9,000). That borrowed money gets deposited elsewhere, and those banks lend out most of it again. This creates a multiplier effect where the current $22 trillion money supply sits on only $3 trillion in actual reserves.

The Critical Difference: Future Demand

Every loan creates an obligation to repay the principal plus interest. This means each dollar lent into existence creates future demand for more dollars than currently exist. Physical money printing just increases supply and stops there, but debt-based money creation simultaneously expands current supply while creating even greater future demand.

Why Deflation Keeps Getting Postponed

This debt structure makes contraction inevitable as loans come due, similar to what caused the Great Depression. However, the Federal Reserve now backstops every potential deflationary event by creating more money, which only makes the next required intervention larger.

Extended Inflationary Period Ahead

The debt-based money system means the US faces a prolonged era of rising prices and inflation that will last considerably longer than most anticipate. Any chance for a “great reset” or collapse remains far off in the future rather than an imminent threat, though the underlying debt dynamics make such an outcome inevitable eventually.

Understanding Deregulation

What Deregulation Really Means

Deregulation is the removal or reduction of government control over business and markets. It's not about abandoning all rules—it's about recalibrating which regulations truly serve the public good and which have become unnecessary burdens.

Why We Regulate in the First Place

Regulation exists to:

1- Address market outcomes deemed unfair (like wages too low to live on), to prevent monopolies from abusing power,

2- Protect communities from pollution and other harms, and to safeguard consumers when they lack information to make safe choices.

These protections serve important purposes. The challenge is determining when they become excessive.

The Current Push

The Trump administration has launched an aggressive "10 for 1" deregulation effort for every new regulation, 10 existing ones must be eliminated. The order requires that total costs of all new regulations be "significantly less than zero." Meaning more savings than added costs. Already, 78 Biden-era orders have been revoked, covering areas from climate to immigration.

What It Means for the Economy

Financial experts expect this drive to reduce administrative costs, increase efficiency, encourage competition, and possibly spur innovation. Deregulation typically implies stronger growth and lower inflation over time.

However, current policy uncertainty is so high that many companies are frozen, waiting for clarity before making investments. Even good policies struggle when businesses can't plan confidently.

Who Benefits Most

Smaller companies stand to gain the most. They can't afford teams of lawyers to navigate complex regulations the way large corporations can. This levels the playing field for entrepreneurs and small business owners.

Energy policy is shifting toward fossil fuels as climate regulations are rolled back. In banking, reduced capital requirements could make it easier for people and businesses to get loans—though this also raises memories of past financial crises.

Why Deregulation Happens

When airlines were deregulated in 1977, competition increased and prices fell, though some small communities lost service. This shows both the promise and complexity of deregulation.

Political ideology matters enormously. Leaders who believe in minimal government intervention push deregulation, while those favoring stronger oversight expand regulation. The pendulum swings based on who's in power.

Timing matters too. After crises like the 2008 financial collapse, public demand forces strict regulation. As memories fade, industries successfully lobby for relief, and the cycle continues.

The Critical Balance

The pendulum must not swing too far. Lax supervision can harm people and encourage excessive risk-taking. The 2008 financial crisis taught painful lessons about what happens when oversight disappears entirely.

Finding the right balance—enough freedom to innovate, enough protection to prevent abuse—remains one of the great challenges facing policymakers.

Looking Ahead

For small businesses, this could mean genuine relief from crushing compliance costs. For consumers, it might mean lower prices and more choices. For the economy overall, it could mean stronger growth and job creation.

But these benefits aren't guaranteed. They depend on removing genuinely unnecessary burdens while maintaining enough oversight to prevent abuse. They require policy certainty so businesses can invest with confidence.

The path forward requires wisdom: learning from past mistakes, embracing beneficial change without recklessness, and remembering that behind every policy decision are real people whose livelihoods hang in the balance.