Liquidity Pressure Sparks a Major Pivot
The Federal Reserve has halted its three-year quantitative tightening program following a resurgence of sharp liquidity pressure in U.S. money markets. The central bank has stopped its balance-sheet reduction and injected billions through emergency repo operations as funding demand has climbed. This significant shift unfolded against a backdrop of mounting global financial tensions, with investors closely observing rapid movements in short-term markets.
The Federal Reserve paused its balance-sheet shrinkage as the Standing Repo Facility experienced a surge in usage, with recent data recording more than $20 billion drawn from the facility. This represented the highest level since the program became permanent, indicating substantial demand for overnight liquidity.
The increased repo demand arose as the quantitative tightening (QT) program reduced bank reserves by allowing Treasury and mortgage-backed securities to roll off the Fed's balance sheet without reinvestment. This process naturally tightened the availability of cash for overnight borrowing, thereby pushing funding demand higher.
The liquidity strain intensified when the Fed injected $13.5 billion into the banking system through overnight repurchase agreements. Officials noted that this injection marked the second-largest single-day operation since the COVID-19 crisis. Analysts pointed out that this amount also exceeded peak repo injections recorded during the Dot-Com period, highlighting the severity of the current funding pressure.
The Federal Reserve viewed the elevated strain as a significant risk to short-term market stability. Rising repo rates and strong Standing Repo Facility usage signaled considerable funding pressure, prompting a central question across markets: How far will the Fed go to prevent tighter liquidity from returning?
QT Ends After a $2.4 Trillion Drawdown
The central bank officially ended its quantitative tightening program on December 1, 2025, after withdrawing approximately $2.4 trillion from the financial system since June 2022. This policy shift occurred just as the crypto market faced a strong pullback in the hours leading up to the announcement.
Under the new operational stance, the Federal Reserve will now roll over all maturing Treasuries. Furthermore, officials will reinvest all proceeds from maturing mortgage-backed securities into short-term Treasury bills. This updated structure is designed to reduce pressure in short-term markets, according to reports.
In conjunction with ending QT, the Fed also adjusted its interest rate settings, cutting the federal funds rate by 0.25 percentage points to a new range of 3.75% to 4.00%. Officials also lowered the interest on reserve balances to 3.90% and moved the reverse repo rate to 3.75%.
This move formally concluded the quantitative tightening policy, which followed the dramatic balance-sheet expansion undertaken during the pandemic when total Fed assets reached nearly $9 trillion. The new framework signals the central bank's transition toward a more stable reserve regime.
Tom Lee of Fundstrat viewed the end of QT as a major positive development for risk assets. Lee noted that the last instance of QT ending historically produced a significant market rally, with a 17% increase observed within three weeks. He also stated that improved liquidity has historically lifted Bitcoin performance and projected a potential new Bitcoin high by late January.
Global Signals Shape Market Expectations
Investors were closely tracking upcoming rate cuts ahead of the December FOMC meeting. A significant number of market participants anticipate the Federal Reserve will shift towards an easing policy as liquidity conditions adjust. However, some analysts have expressed caution regarding reserve levels, warning that a liquidity squeeze could re-emerge if reserves continue to shrink.
Markets also closely monitored developments in Japan. Analyst Ted Pillows reported that the probability of a Bank of Japan rate hike for December had climbed to 81%, adding another layer of uncertainty as global central banks navigate different policy paths.
Analysts suggest that the Federal Reserve may later engage in purchasing Treasury bills or other securities to maintain ample reserves. These potential steps could support smooth interbank activity and help stabilize funding markets amidst developing global tensions.