QT is over. When can we expect QE?

After draining $2.41 trillion in liquidity from the system since 2022, reducing its balance sheet from $8.96 trillion to $6.55 trillion, quantitative tightening officially ended on December 1. 

To understand why this matters to investors, we must first recap the purpose of the Fed's balance sheet.

At its core, the Fed’s balance sheet is basically a giant financial ledger. One side shows what it owns, primarily Treasury bonds and mortgage-backed securities, and the other side shows what it owes, such as currency in circulation and bank reserves. It has been around since the Fed was created in 1913, but it didn’t really become an active policy tool until after the 2008 financial crisis. That’s when the Fed began using large-scale quantitative easing, purchasing trillions of dollars in assets to help stabilize the economy and stimulate growth again.

In short, when the Fed engages in quantitative easing (QE) and buys securities, it injects money into the financial system. That extra liquidity pushes interest rates lower, supports economic activity, and generally lifts the S&P 500 and risk assets overall. Bond yields fall because the Fed acts as a price-insensitive buyer, pushing prices up and yields down. Lower Treasury yields feed directly into cheaper mortgage rates, and the Fed’s MBS purchases reinforce that effect by increasing demand for mortgage-related assets. With more liquidity and lower borrowing costs, credit spreads tend to tighten.

Quantitative tightening (QT) is the opposite of QE. As the Fed shrinks its balance sheet, liquidity is withdrawn, rates move higher, and economic conditions typically cool.

For instance, from March 2009 to March 2010, the Fed purchased $1.25 trillion in MBS, $200 billion in agency debt (Fannie Mae, Freddie Mac, Ginnie Mae), and $300 billion in long-term Treasuries to inject liquidity and stabilize the housing market. Then, from November 2010 to June 2011, it added another $600 billion in long-term Treasuries to prevent the economy from slipping into deflation.

During the COVID-19 pandemic, the Federal Reserve once again aggressively expanded its balance sheet by $4.8 trillion between March 2020 and May 2022, reaching nearly $9 trillion, in an effort to support markets and the broader economy.

Today, the end of QT is linked to tensions in the financial system, as evidenced by the widening spread between SOFR and IORB and record use of the Fed's Standing Repo Facility (SRF), an emergency liquidity tool. There are also deeper structural problems: despite low unemployment (4.4%), the private sector is losing jobs, and government hiring masks the deterioration.

When might the Fed restart QE?

Markets seem to be betting that quantitative easing could return as early as the first half of 2026, especially if Kevin Hassett, who has been calling for deeper and faster rate cuts, is ultimately appointed as the next Fed chair.