The Federal Reserve announced at its meeting last week that it will halt the runoff of its balance sheet—commonly referred to as quantitative tightening (QT)—beginning December 1, marking a notable shift in its liquidity management strategy. Many are asking whether the Fed’s latest announcement effectively marks a return to quantitative easing (QE). The answer, in short, is both yes and no — it shares some of QE’s liquidity-supporting features but stops short of the large-scale asset purchases that define true easing. 

Under the new plan, the Fed will fully reinvest all maturing Treasury securities, currently capped at $5 billion per month, while reinvesting any maturing agency mortgage-backed securities (MBS) into Treasury bills (T-bills) rather than into new agency paper. The change effectively stops the shrinkage of the balance sheet, though it does not end QT entirely, as MBS runoff—currently running at $15 billion to $20 billion per month—will continue. 

Fed Chair Jay Powell emphasized that the level of reserves in the banking system is expected to reach an “ample” level within a few months, even as liquidity indicators suggest the system is already tight. The combination of reserves and reverse repos now stands at its lowest level since 2020, contributing to a creeping rise in the Secured Overnight Financing Rate (SOFR). Simultaneously, usage of the Fed’s repo facility has ticked higher, signaling that some market participants are becoming more constrained on cash. By actively buying T-bills, the Fed gains a nimble mechanism to adjust reserves—a tactic it last used in 2019 when funding markets tightened. 

Quantitatively, the Fed’s current T-bill holdings remain modest at $195.49 billion, a relatively small portion of its $6.6 trillion balance sheet. This gives policymakers substantial room to expand T-bill purchases if needed to manage reserves without expanding the overall balance sheet. The structure of this policy pivot is nuanced: the Fed will allow MBS holdings to continue rolling off, thereby reducing duration exposure, while offsetting those redemptions with new T-bill purchases, keeping the aggregate balance sheet stable and reserves roughly unchanged. 

The backdrop to this decision is the surge in Treasury bill issuance over the past several quarters, which has absorbed liquidity from money markets. As the Treasury General Account (TGA) swelled, bank reserves declined, tightening repo conditions and pushing the federal funds rate and SOFR slightly higher amid competition for collateralized funding. The Fed’s new approach effectively seeks to rebalance the mix between reserves and bills while preventing another bout of funding market stress. 

Market implications are mixed. From a liquidity standpoint, this policy should ease short-term funding pressures, particularly in overnight and term repo markets, but offers little direct support for longer-duration Treasuries. Indeed, long-end yields have risen, with the 10-year Treasury yield climbing to around 4.10%, up from 4% earlier in October, as investors reassess the prospects for another rate cut in December and react to the signal that the Fed is prioritizing liquidity management over outright easing. 

In essence, the Fed’s decision reflects an effort to stabilize reserves without reigniting balance sheet expansion. While short-term rates may find support from T-bill buying, longer yields are likely to remain under pressure amid persistent supply, cautious risk sentiment, and only incremental relief from what amounts to a technical—not directional—pivot in monetary policy. 

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