The Real Reason the Fed Just Ended QT
The Real Reason the Fed Just Ended QT
Heresy Financial: 12-11-2025
The Federal Reserve has officially ended its period of quantitative tightening (QT) as of December 1, 2025, marking a significant shift in monetary policy. QT, which involved shrinking the Fed’s balance sheet by allowing assets to mature without reinvestment, has given way to a more nuanced approach.
But what does this mean for the economy, and what’s driving the Fed’s decision?
The end of QT doesn’t signal an impending financial or liquidity crisis, as some market observers have suggested. Rather, it’s a deliberate move to stabilize the Fed’s balance sheet, similar to the period between 2015 and 2017. The Fed’s reverse repo facility hitting zero and occasional taps on the repo facility by banks are simply a reflection of normal operational liquidity management.
The Fed has established standing repo facilities to prevent acute liquidity crises by supplying banks with unlimited overnight liquidity. This means that the banking system is well-equipped to handle liquidity needs, and the risk of a crisis is low.
The Fed’s approach to ending QT is multifaceted. While it’s continuing to wind down its mortgage-backed securities (MBS) holdings, it is rolling over maturing Treasury securities by reinvesting repayments into new Treasury bills. This dual strategy effectively injects liquidity into the government borrowing market, making it easier and cheaper for the government to borrow.
The overall balance sheet will remain stable, but with a shift in liquidity distribution between sectors. The Fed is withdrawing liquidity from the mortgage market while supporting government borrowing. This has significant implications for the economy and financial markets.
The underlying driver of the Fed’s policies is the government’s insatiable appetite for debt financing. The Federal Reserve Reform Act of 1977 mandates the Fed to maintain monetary growth commensurate with the economy’s long-run productive capacity, effectively ensuring continuous expansion of the money supply.
The Fed’s triple mandate – maximum employment, stable prices, and moderate long-term interest rates – serves the government’s fiscal needs by maximizing the tax base, maintaining inflation to reduce real debt burdens, and keeping borrowing costs manageable. This framework explains why QT is ending, MBS holdings are still being wound down, Treasury bill purchases continue, bank deregulation is underway, and interest rate cuts are imminent.
Looking ahead, short-term interest rates are expected to decline significantly in 2026, driven by leadership changes at the Fed and political pressures to ease monetary policy. Jerome Powell’s term ends in 2026, and new leadership is pushing for deregulation of banks to allow them to effectively perform QE by buying unlimited Treasuries, bypassing Fed balance sheet expansion.
Meanwhile, long-term Treasury yields are rising despite falling short-term rates, causing a steepening yield curve. This reflects market expectations of future inflation driven by the government’s need to borrow and spend using newly created money.
The end of QT marks a significant shift in monetary policy, driven by the government’s need for debt financing and the Fed’s mandate to support the economy. While fears of deflation and default may be misplaced, the implications for real purchasing power and quality of life are complex.
As the Fed continues to navigate the complexities of monetary policy, one thing is clear: the money supply will continue to expand, supporting rising asset prices and reducing defaults. But what does this mean for the average investor and consumer?
Stay tuned for further insights and analysis.