Liquidity Strain Rises as Fed Ends QT and Starts Major Policy Shift
- The Fed suspends QT as repo use rises and short-term funding strain gains speed.
- New liquidity steps start as banks seek faster access to overnight support lines.
- Market focus turns to how emerging flows shape risk assets and future rate steps.
The Federal Reserve ended its three-year quantitative tightening program after sharp liquidity pressure resurfaced in U.S. money markets. The bank stopped its balance-sheet reduction and injected billions through emergency repo operations as funding demand climbed. The shift unfolded while global financial tensions mounted and investors watched rapid movements in short-term markets.
Liquidity Pressure Sparks a Major Pivot
The Federal Reserve halted balance-sheet shrinkage as the Standing Repo Facility showed a surge in usage. Recent data recorded more than $20 billion drawn from the facility. This was the highest level since the program became permanent.
The repo demand arose as the QT program reduced reserves, as the Fed allowed Treasury and mortgage-backed securities to roll off without reinvestment. That process tightened the availability of cash for overnight borrowing and pushed 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 reached the second-largest single-day operation since the COVID-19 crisis. Analysts pointed out that the amount also exceeded peak repo injections recorded during the Dot-Com period.
The Fed viewed the elevated strain as a risk to short-term market stability. Rising repo rates and strong SRF usage signaled significant funding pressure. This raised 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 ended QT on December 1, 2025, as officials confirmed that the program withdrew roughly $2.4 trillion from the financial system since June 2022. The shift came just as the crypto market faced a strong pullback in the hours before the announcement.
Under the new stance, the Fed will roll over all maturing Treasuries. Officials will also reinvest all proceeds from maturing mortgage-backed securities into short-term Treasury bills. A Reuters report stated that the updated structure aims to reduce pressure in short-term markets.
The Fed also adjusted its interest rate settings, cutting the federal funds rate by 0.25 percentage points to a range of 3.75% to 4.00%. Officials lowered the interest on reserve balances to 3.90% and moved the reverse repo rate to 3.75%.
Related: Fed’s $13.5B Repo Injection Sparks Market Recovery Wave
Observers noted that the shift formally ended QT. The policy followed the dramatic balance-sheet expansion during the pandemic, when total assets reached nearly $9 trillion. The new framework moves the central bank toward a more stable reserve regime.
Furthermore, Tom Lee of Fundstrat viewed the end of QT as a major moment for risk assets. Lee stated that the last QT ending produced a 17% market rally within three weeks. He also said that improved liquidity historically lifted Bitcoin performance and projected a potential new Bitcoin high by late January.
Global Signals Shape Market Expectations
Investors tracked upcoming rate cuts ahead of the December FOMC meeting. Many market participants expect the Fed to shift toward easing as liquidity conditions adjust. Yet some analysts expressed caution about reserve levels, stating that a liquidity squeeze could return if reserves shrink again.
Markets also watched developments in Japan. Analyst Ted Pillows said the probability of a Bank of Japan rate hike for December climbed to 81%. This added another layer of uncertainty as global central banks moved in different directions.
Analysts noted that the Fed may later buy Treasury bills or other securities to maintain ample reserves. These steps may support smooth interbank activity and help stabilize funding markets as global tensions develop.
