US Economy: Fed Considers Ending Quantitative Tightening (QT)

■ In his speech on the 14th, Chairman Powell highlighted downside risks to employment and indicated a potential rate cut at the October FOMC meeting. 

■ By signaling a pause in quantitative tightening (QT) with a "cautious approach," he emphasized the Fed's commitment to maintaining financial market stability.  

 
   Federal Reserve Chairman Powell, speaking to the National Association of Business Economists (NABE) on the 14th, hinted at further rate cuts at the upcoming Federal Open Market Committee (FOMC) meeting scheduled for October 28-29. Powell noted that, similar to the September meeting when the rate cut was decided, "downside risks to employment are rising." Despite delays in official data releases, including September employment figures—caused by the partial US government shutdown—available evidence suggests that the labor market slowdown persists, akin to the situation during the September FOMC. Based on these indications, markets are likely to see a 25-basis point rate cut at the October FOMC. 

 
   However, the core theme of the speech, "Understanding the FRB's Balance Sheet," primarily served as a signal that the Fed plans to halt quantitative tightening (QT). Historically, the Federal Reserve has distinguished between using QE to reduce its balance sheet and adjusting the policy rate based on economic conditions. Even if QT ends, its impact on the broader economic outlook would likely be limited. The aim is to pause QT while ensuring that financial institutions have ample liquidity, thereby safeguarding financial market stability. During the COVID-19 pandemic, the Fed engaged in large-scale quantitative easing (QE), purchasing vast amounts of U.S. Treasury bonds and mortgage-backed securities (MBS), injecting significant liquidity into the economy. QT began in June 2022, gradually reducing bond holdings by ceasing reinvestments from maturing securities. By the end of September 2025, the Fed’s balance sheet had shrunk from 35% of nominal GDP at the end of March 2022 to 22%. Powell explained that, according to the Fed’s long-term plan, QT would halt once reserve balances at the Fed are "slightly above ample levels," a point he expects to approach in the coming months. This "prudent approach" aims to prevent market disruptions similar to those seen in September 2019, when a combination of QT and other factors, such as tax payments, caused liquidity shortages and a spike in short-term interest rates. 

 
   This move will keep the Fed’s balance sheet considerably larger than before 2008, when it accounted for less than 10% of nominal GDP. Earlier, Board Member Bowman mentioned that "it would be ideal to keep the FRB's balance sheet as small as possible" and called for a reevaluation of operational systems. Nonetheless, the anticipated decision to end QT in the near future reflects the Fed's ongoing focus on maintaining financial market stability through a "prudent approach."