Federal Reserve Chairman Jerome Powell indicated that the end of the Fed’s quantitative tightening program is nearing as liquidity conditions gradually tighten and the reverse repo facility is near minimal utilization. | Photo credit: ELIZABETH FRANTZ
Federal Reserve Chairman Jerome Powell said Tuesday that the end of the central bank’s long-running effort to reduce the size of its investments, commonly known as quantitative tightening, or QT, could be in sight.
Given the central bank’s long-term goal of leaving enough liquidity in the financial system to allow for firm control over short-term rates and normal money market volatility, Powell said that “we may be approaching that point in the coming months, and we are closely watching a wide range of indicators” to know whether that has happened.
In a signal that the end phase is approaching, “there are signs of a gradual tightening of liquidity conditions, including a general strengthening of the repo rate along with more notable but temporary pressures on select dates,” Powell said at a meeting held by the National Association for Business Economics in Philadelphia.
In his comments, Powell also defended the central bank’s use of the balance sheet and other monetary policy tools.
The endgame for QT has been the subject of market debate for some time, but has gained urgency in recent weeks as the Fed’s reverse repo facility (RRP) has effectively become close to zero. The RRP tool helps put a soft floor under short-term interest rates and helps the Fed keep its interest rate target within the desired range, which is now between 4% and 4.25%. That facility peaked at $2.6 trillion at the end of 2022.
The RRP facility has existed largely to mop up the excess liquidity the Fed created during the pandemic, and now that it has been effectively drained, QT will be reducing reserves.
The further reserves fall, the more likely it is that liquidity shortages could emerge without warning and money markets could go into turmoil, which in turn complicates the Fed’s ability to keep its monetary policy interest rate target where it wants.
Something like this played out in September 2019 during the last QT period, forcing the Fed to take unexpected action to add liquidity back to the system. Since then, the Fed has added something called the Standing Repo Facility – which provides quick cash loans to eligible financial firms – as a shock absorber for the market’s liquidity needs.
The money markets and the Fed made it through the end of the third quarter without a hitch, with markets not having to turn to the Fed for liquidity needs of any substantial magnitude.
STILL NOT COMPLETELY CLEAR WHEN QT MAY END
The QT process, which has been ongoing since 2022, is intended to remove excessive amounts of liquidity that the Fed added to financial markets during the COVID-19 pandemic. Cash was pumped into the financial system through large-scale purchases of Treasury and mortgage bonds, intended to stabilize markets and provide stimulus when the Fed’s short-term interest rates were near zero.
The asset purchases allowed the Fed’s assets to more than double to about $9 trillion. By allowing a fixed number of bonds to mature each month and not replace them, the Fed’s balance sheet has been reduced to $6.6 trillion.
It’s unclear how much further the Fed can go with QT, but some officials have said there is still plenty of liquidity in the financial system. Powell did not say how much the Fed might reduce its investments.
A survey of major banks, money managers and others, conducted ahead of the Fed’s September 16-17 Federal Open Market Committee meeting, predicted a January 2026 end date for QT that would put the total size of the Fed’s balance sheet at $6.2 trillion. Survey respondents also said they saw the level of bank reserves at $2.9 trillion, up from the current level of $3 trillion.
FED CHIEF DEFENDS THE USE OF BALANCE SHEET AND OTHER TOOLS
Powell noted in his remarks that, broadly speaking, “our ample reserves regime has proven remarkably effective in implementing monetary policy and supporting economic and financial stability.”
The Fed’s use of its balance sheet as a policy tool, as well as the tools it uses to help manage interest rates, is controversial, no less so than under the current Trump administration. Finance Minister Scott Bessent has accused the central bank of widespread “mission creep” over its use of its balance sheet, which he says has disrupted financial markets.
The Fed has also come under fire for its interest rate management tools, which have paid out so much money to eligible financial firms that the Fed is now dealing with a $244 billion loss, leading some politicians to question whether these powers should be revoked.
Powell warned against such a move, saying, “If our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control of interest rates.”
Getting it back “would require a large sale of securities in a short period of time to reduce our balance sheet and the amount of reserves in the system,” Powell said, adding that “the volume and speed of these sales could strain the functioning of the Treasury market and endanger financial stability.”
Published on October 15, 2025
#Fed #nears #quantitative #tightening #Powell #signals #caution