The Federal Reserve’s quantitative tightening (QT) program—once billed as a slow, steady unwind of pandemic-era liquidity—may be nearing an early exit. Several Wall Street institutions are warning that the Fed could announce a halt to QT or at least hint at one during the upcoming FOMC meeting on October 28–29.
The reason? Friction in the money markets is starting to show up in ways the Fed can’t ignore.
Signs of a Cash Crunch
Analysts point to three flashing warning lights:
- Rising short-term rates – Both the Secured Overnight Financing Rate (SOFR) and repo borrowing costs have climbed in tandem.
- Target range drift – The federal funds rate has been hugging the upper end of its 4.00%–4.25% target range.
- Standing Repo Facility (SRF) taps – Some banks unexpectedly tapped the Fed’s SRF, a backstop meant to provide quick cash against Treasuries.
None of these signals scream "crisis," but together they suggest the plumbing of the financial system is getting creaky. As one strategist quipped, "You don’t wait for the pipes to burst before calling the plumber."
What Wall Street Expects
- Wrightson ICAP analysts say the volatility is enough to justify moving to the "next phase" of Fed policy normalization.
- Jefferies expects the Fed to halt forced maturities of Treasuries but allow mortgage-backed securities (MBS) to keep rolling off naturally, given the sluggish housing market.
- Evercore ISI predicts the Fed will signal an end to QT this month, aiming to wrap up before year-end liquidity pressures, though the actual stop could slip into early 2026.
- Goldman Sachs is more cautious, penciling in a January announcement and a February finish, citing Powell’s October 14th remark that QT could end "in the coming months."
The Balancing Act
QT was designed to shrink the Fed’s balance sheet after the pandemic ballooned it to $9 trillion. It now sits at about $6.6 trillion. The problem is figuring out how much liquidity can be drained before markets seize up.
Fed Governor Christopher Waller recently said bank reserves—still around $3 trillion—are approaching the "critical point" where the system has just enough liquidity to function smoothly. Most of the QT so far has eaten into the Fed’s reverse repo facility (RRP), but reserves are now in sharper focus.
Why It Matters
Ending QT early would effectively mean no more monetary tightening from the balance sheet side. That could:
- Stabilize short-term rates, keeping the fed funds rate from drifting higher.
- Ease term premiums, which have been creeping up in bond markets.
- Reduce the risk of a repeat of past liquidity crunches, like the repo market blow-up of 2019.
For investors, the message is clear: the Fed is prioritizing technical stability over squeezing out every last drop of liquidity. Or, put another way, the central bank doesn’t want to break the plumbing while trying to fix the house.
The Bottom Line
The Fed’s QT experiment may be winding down sooner than expected. With money market stress flashing yellow, Wall Street is betting Powell and company will choose stability over stubbornness. For markets, that could mean one less tightening headwind—but also a reminder that the Fed is still flying blind when it comes to knowing exactly how much liquidity is "just enough."