Just this Thursday, risk assets may get another boost—will the Federal Reserve stop "quantitative tightening"?

If the Federal Reserve decides to stop its Quantitative Tightening (QT) program, it could inject new momentum into the improving global liquidity environment and provide decisive support for risk assets.

The market is increasingly anticipating that the Federal Reserve will announce the end of its balance sheet reduction process at this Thursday’s FOMC meeting. This expectation has emerged as key funding markets are sending signs of strain, and recent statements by Fed officials have opened a window for a policy shift.

Fed Chair Jerome Powell said earlier this month that the reduction of the balance sheet may be stopped “in the coming months,” and board member Christopher Waller also acknowledged that bank reserves in the system may already be at an “ample” level. As a result, most Wall Street strategists have adjusted their forecasts, expecting the central bank to pause balance sheet reduction by the end of October.

For investors, ending QT will eliminate a persistent liquidity headwind. This is expected not only to ease money market pressures that have led to higher funding costs, but also to lay the foundation for a rebound in all types of risk assets by lowering leverage costs and restoring market depth.

Farewell to QT: A Key Step to Stabilizing the Market

Recent market dynamics indicate that the need to end QT is becoming increasingly urgent. As the balance in the Federal Reserve’s Overnight Reverse Repurchase Agreement (RRP) facility dries up, an important financial system “shock absorber” is being weakened, resulting in rising funding costs and heightened rate volatility.

According to strategists’ analysis, repo rates have now risen above the Interest on Reserve Balances (IORB) rate, and even reached or surpassed the upper bound of the Fed’s federal funds rate target range. This has forced market participants to make greater use of the central bank’s Standing Repo Facility (SRF). This dynamic effectively constitutes a “mechanical” tightening of financial conditions; even without any change to the policy rate, it increases leverage costs, suppresses risk appetite, and widens risk premiums for various assets.

Halting QT will directly stop the continued outflow of bank reserves and signal that the rebuilding of systemic liquidity buffers is about to begin. This “shock absorber” is crucial for maintaining normal operations in the repo market and stable short-term interest rates. As reserves stabilize, the system’s funding flexibility will be restored, reducing repo market volatility and the risk of a 2019-style funding crunch recurring.

Once general collateral repo rates fall back into the Fed’s target range, it will help lower rollover costs, restart relative value trades, and enable dealers to regain the willingness to take on risk. This is a prerequisite for narrowing spreads, deepening liquidity, and reducing volatility in credit, equity, and rate markets.

Reshaping Policy Signals and Market Confidence

Ending QT will also send a clear signal to the market: at present, the Fed prioritizes maintaining policy control and market stability over further balance sheet reduction.

This move is also significant for the U.S. Treasury market. As Minneapolis Fed researchers have pointed out, the current system has become “rich in collateral but poor in cash.” Ending QT will help alleviate collateral glut pressures, allowing existing reserves to fund the market more effectively, thus improving market depth and reducing reliance on the Fed as the lender of last resort.

A more stable U.S. funding environment will produce widespread spillover effects. It will help alleviate dollar scarcity, ease global financial conditions, and support a broader revival of cross-asset risk appetite. According to Bloomberg strategist Simon White, given that excess liquidity in the G10 is turning downward, the Fed’s support will be particularly timely.

More importantly, if the Fed chooses to support domestic liquidity, it will resonate with the strong upward momentum in China’s M1 money supply growth and fiscal policy transmission. This scenario would create a synchronized liquidity foundation driven by the world’s two largest economies, supporting risk assets and suppressing market volatility.

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