The Endgame for QT May Be Closer Than Expected

As the Federal Reserve prepares for its October 28–29 policy meeting, investors are focused on more than just the next rate decision. Attention has shifted sharply toward the central bank’s $6.6 trillion securities portfolio, with growing consensus that the Fed’s two-year experiment in balance-sheet reduction may be nearing its end.

What began in June 2022 as a deliberate effort to shrink pandemic-era liquidity has now become a source of tension. U.S. money markets are showing strain, and several leading banks — including Bank of America, JPMorgan Chase, Deutsche Bank, and Goldman Sachs — now expect Chair Jerome Powell to announce the end of QT as early as this month.

“You can make the case that the Fed is already at the in-between stage — they’ve likely over-drained cash and know it,” said Mark Cabana, head of U.S. rates strategy at Bank of America.

Markets Flash Warning Signs

Since QT began, the Fed’s asset runoff has removed more than $2 trillion in reserves from the banking system. That drawdown has nearly emptied the reverse repurchase (RRP) facility, a key liquidity buffer, just as a wave of new Treasury bill issuance is pulling even more cash out of reserves.

The symptoms of stress are visible:

• Short-term funding rates have climbed persistently over the past month, even outside of typical volatility windows like tax payment dates.

• The effective federal funds rate — which typically stays steady between FOMC meetings — has moved higher three times in the last month, something not seen since 2018.

• The Fed’s emergency lending tools, designed to ease funding pressures, have seen renewed use in recent weeks.

“Money markets at current or higher levels should signal to the Fed that reserves are no longer abundant,” Cabana and strategist Katie Craig wrote Thursday.

The “Ample Reserves” Debate

At the core of the issue is a technical but crucial concept: how much liquidity the system truly needs. The Fed has long said it would halt QT once reserves approached a level deemed “ample” — the minimum needed to maintain smooth market functioning.

Governor Christopher Waller previously estimated that threshold at $2.7 trillion. With reserves now hovering at $2.9 trillion, strategists say the Fed may already be close enough to justify ending the runoff.

BNY Mellon Chief Investment Officer Jason Granet noted that the issue has “become elevated in the conversation,” adding that policymakers “see the signals and are ready to act.”

If QT ends this month, the Fed could soon pivot to rebuilding reserves via Treasury bill purchases and temporary open-market operations, similar to what it did after the 2019 funding crisis.

Lessons from 2019 — and Warnings for 2025

The specter of September 2019 looms large. That year, the Fed’s overly aggressive balance-sheet reduction triggered a liquidity crunch that sent repo rates surging overnight, forcing emergency intervention.

Many on Wall Street believe the Fed is approaching a similar tipping point. JPMorgan strategist Teresa Ho warned that “committing the same mistake twice could have significant ramifications,” especially given the financial system’s heavier reliance on money market funds today.

In recent speeches, Powell has hinted that the Fed is aware of these risks. His remarks two weeks ago devoted an entire section to the balance sheet — signaling, for the first time, that an early end to QT is under active consideration.

With the effective fed funds rate rising toward the interest on reserve balances (IORB), policymakers’ patience is wearing thin. As Dallas Fed President Lorie Logan said earlier this year, the Fed’s goal is for short-term rates to stabilize “close to or slightly below” IORB — a balance that is now clearly being tested.

What Happens Next

If the Fed halts QT this month, markets could interpret the move as an implicit acknowledgment that liquidity, not inflation, has become the more pressing risk. Such a decision would also align with expectations for two rate cuts by year-end, as traders anticipate a more accommodative policy stance heading into 2026.

Still, unwinding QT too soon carries its own risks. It may complicate the Fed’s broader effort to control inflation expectations and could reignite asset bubbles if liquidity returns too quickly.

The coming meeting, therefore, represents a delicate inflection point — one where Powell must balance financial stability against credibility in inflation management. The decision on QT could determine not only the trajectory of short-term funding markets but also the tone of monetary policy well into the next election year.