Fed May Signal Endgame for QT as Liquidity Management Takes Center Stage — Evening Brief – 10.28.25 

Wall Street should watch if the Federal Reserve places renewed emphasis on liquidity management and the future of quantitative tightening (QT) at this week’s Federal Open Market Committee (FOMC) meeting. While the central bank’s balance sheet reduction has progressed smoothly to date, policymakers appear poised to slow the pace of runoff as bank reserves approach levels that risk unsettling short-term funding markets. 

Bank reserves now stand at just under $3 trillion, equivalent to about 10% of U.S. GDP—a level considered broadly comfortable. However, Fed officials are keenly aware of how thin that cushion can become. The last time reserves dipped toward 7% of GDP—during the 2019 repo market disruption—a modest confluence of corporate tax payments and Treasury settlements triggered a sharp spike in repo rates and a scramble for liquidity. 

To avoid repeating that episode, policymakers are expected to maintain a buffer of at least 9% of GDP in reserves, implying the Fed has scope to allow roughly $300 billion of additional balance sheet reduction before hitting critical levels. 

Currently, the Fed allows about $60 billion in Treasuries and up to $35 billion in agency MBS to roll off its balance sheet each month, though actual runoff averages closer to $20 billion due to slower MBS prepayments. At that pace, the remaining $300 billion of reserves drawdown could be reached within 12–15 months, suggesting a policy decision point is approaching. 

The most likely scenario: the Fed ends Treasury runoff entirely in early 2026 while maintaining a gradual MBS roll-off. However, officials face a dilemma—while they would prefer to reduce MBS holdings (still near $2 trillion), they may need to accept holding them longer to avoid excessive reserve depletion. 

There is also room for the Fed to shift runoff composition, continuing MBS redemptions while reinvesting into Treasury bills to sustain reserve balances without signaling a return to full-scale quantitative easing. Such a shift could prove supportive for market liquidity.