Core Viewpoint - The Federal Reserve officially announced the end of its quantitative tightening (QT) program effective December 1, 2025, transitioning to a neutral reinvestment state, which is not considered a restart of quantitative easing (QE) but a shift under the "ample reserves framework" [1][7][17] Summary by Sections QT Process Overview - The QT policy began on June 1, 2022, amid severe inflation, with a maximum monthly reduction of $95 billion in liquidity from the financial system [2] - The QT process saw adjustments, including a reduction in the monthly cap for Treasury securities and MBS, indicating a preparation for exiting QT [2] Balance Sheet Structure - The Fed's holdings of Treasury securities decreased from $5.77 trillion at peak to $4.20 trillion, while MBS holdings fell from $2.74 trillion to $2.07 trillion [3] - Significant interruptions occurred during the banking crises in March 2023 and due to seasonal tax payments in January 2025, leading to temporary liquidity injections [3] Monetary Market Pressure Signals - Key indicators in the monetary market showed stress, including a significant drop in the Fed's overnight reverse repurchase agreement (ON RRP) balance, indicating low liquidity buffers [4] - Rising volatility in short-term financing market rates was observed, with increased spreads between effective federal funds rate and interest on excess reserves [4][5] Policy Adjustment Details - The FOMC unanimously agreed to end QT, with a focus on reinvesting all principal payments from maturing securities into short-term T-bills [7] - The Fed aims to align its balance sheet with banking system reserve needs and nominal GDP growth, indicating a dynamic approach to balance sheet management [7][16] Impact of Reinvestment on Liquidity - The end of QT allows for reinvestment of maturing securities back into the financial system, which is expected to enhance liquidity and lower long-term interest rates [8][9] - The reinvestment strategy is projected to stabilize the balance sheet while addressing the ongoing natural reduction of MBS holdings [9] Bond Market Reaction - The bond market reacted swiftly to the end of QT, with a notable decline in yields for both 10-year and 30-year Treasury securities [10] - The narrowing of swap spreads indicates a renewed interest in Treasury securities, with significant inflows into 10-year bonds following the announcement [10] Real Estate and Corporate Financing - The real estate market is expected to benefit from lower long-term interest rates, with forecasts indicating a decrease in mortgage rates [12] - Corporate financing conditions are improving, with a rise in investment-grade and high-yield bond issuance, reflecting lower borrowing costs [13] Currency and Bitcoin Trends - The dollar weakened significantly following the announcement, with a notable drop in the DXY index, indicating reduced attractiveness of the dollar [14] - Bitcoin experienced volatility post-announcement, with mixed market reactions and a shift towards a cautious outlook among investors [15] Policy Framework Adjustment - The end of QT signifies a deeper evolution in the Fed's monetary policy framework, moving towards managing short-term rates through excess reserves rather than relying on reserve scarcity [16] - Future adjustments to the balance sheet will be aligned with economic activity and reserve needs, indicating a flexible approach to monetary policy [16] 2025 Outlook - The Fed's balance sheet is expected to stabilize around $6.54 trillion until the end of 2025, with potential for net purchases of Treasury securities in 2026 [17] - Improved liquidity conditions are anticipated to positively impact various sectors, including bonds, real estate, and corporate financing [17]

Core Viewpoint - The Federal Reserve's transition from a shrinking balance sheet to a liquidity stabilizing anchor marks a key point in the normalization of monetary policy in the post-pandemic era [1] Summary by Sections Federal Reserve's Balance Sheet Management - The Federal Reserve announced the end of its quantitative tightening (QT) plan effective December 1, 2025, ceasing the active reduction of its securities holdings [1] - The total assets of the Federal Reserve stood at $6.54 trillion as of October 22, 2025, down from a peak of $8.96 trillion in April 2022, maintaining a ratio of approximately 22% of nominal GDP [1] QT Process Review - QT began on June 1, 2022, amid the highest inflation since December 1981, with a maximum monthly reduction of $95 billion in liquidity from the financial system [2] - The pace of QT was adjusted multiple times, with the monthly reduction slowing to approximately $38.5 billion by April 2025 [2] Balance Sheet Structure - The holdings of U.S. Treasury securities decreased from a peak of $5.77 trillion in 2022 to $4.20 trillion by October 2025, while MBS holdings fell from $2.74 trillion to $2.07 trillion [3] - Significant interruptions in the QT process occurred during the banking crises in March 2023 and due to seasonal tax payments in January 2025 [3] Monetary Market Pressure Signals - Key indicators in the monetary market showed stress, including a significant drop in the Federal Reserve's overnight reverse repurchase agreement (ON RRP) balance, which fell from $2.55 trillion to $219 billion [4] - The effective federal funds rate (EFFR) and interest on excess reserves (IOER) spread widened, indicating increased volatility in short-term financing markets [4] Policy Adjustment Details - The FOMC unanimously agreed to end QT, with a focus on reinvesting the principal payments from maturing securities into short-term T-bills [6] - The Federal Reserve aims to align its balance sheet with banking reserve needs and nominal GDP growth, indicating a shift towards a more dynamic management approach [6] Impact of Reinvestment on Liquidity - The end of QT allows for the reinjection of funds into the financial system, which is expected to lower long-term interest rates and improve liquidity conditions [7] - The reinvestment strategy is projected to lead to a monthly balance sheet expansion of $25 billion to $35 billion due to the natural reduction of MBS holdings [8] Bond Market Reaction - The bond market reacted swiftly to the end of QT, with a notable decline in the yields of 10-year and 30-year U.S. Treasury securities [9] - The narrowing of swap spreads indicates a renewed interest in trading strategies that bet on the convergence of Treasury yields and swap rates [9] Mortgage and Corporate Financing - The housing market is expected to benefit from declining long-term interest rates, with forecasts suggesting a drop in 30-year fixed mortgage rates [10] - Corporate financing conditions are improving, with a significant increase in investment-grade corporate bond issuance and a reduction in high-yield bond spreads [11] Currency and Bitcoin Trends - The U.S. dollar weakened significantly following the announcement, with the dollar index experiencing its largest single-day drop since July 2024 [12] - Bitcoin's price showed volatility post-announcement, reflecting mixed market sentiment regarding future liquidity conditions [13] Policy Framework Adjustment - The end of QT signifies a deeper evolution in the Federal Reserve's monetary policy framework, moving towards a model that adjusts reserves in line with economic activity [14] - Economic data supports a cautious easing path, with expectations of potential interest rate cuts in 2026 [14] 2025 Outlook - The Federal Reserve's balance sheet is expected to stabilize around $6.54 trillion until the end of 2025, with a potential shift to net purchases of Treasury securities in early 2026 [15] - The overall liquidity improvement is anticipated to positively impact various sectors, including real estate and small business financing, while putting pressure on the dollar [15]

Group 1 - The Federal Reserve's balance sheet reduction is putting pressure on the repurchase agreement market, indicating that tools for controlling short-term interest rates will become increasingly important [1] - As of May 14, the Federal Reserve's balance sheet stood at $3.24 trillion, slightly above the previous week and close to the level when quantitative tightening (QT) began nearly three years ago [2] - The Federal Reserve needs to maintain its balance sheet above $3 trillion to ensure sufficient liquidity and avoid market pressure [2] Group 2 - The Standing Repo Facility (SRF) helps reduce the reserve requirements needed for the central bank to operate effectively under the "ample reserves framework" [3] - The New York Fed plans to incorporate SRF's early settlement operations into its regular schedule to support market stability [3] - There are obstacles that hinder counterparties from using the SRF, including issues with netting transactions and uncertainty in allocation, which increase the cost of using the tool [3]