The Latest FOMC Meeting Signals a Shift in QT

The latest FOMC meeting revealed a significant development regarding the Fed’s balance sheet strategy. Powell and the Committee have effectively tapered quantitative tightening (QT), reducing Treasury runoff from $25 billion to just $5 billion per month starting April 1. A fivefold slowdown speaks volumes about the true intent of the move.

While Powell framed the decision as a desire to extend the QT timeline rather than stop it outright, the substance tells a different story: QT is essentially over. For skeptics, the dissent within the Committee highlights the pivot. What was initially floated as a “tactical pause” tied to debt ceiling constraints has now morphed into a full stop. Net-net, this is a positive signal for market liquidity.

The Bigger Implication

I suspect this decision was heavily influenced by Powell’s ongoing weekly meetings with Bessent. The current administration has made no secret of its preference for lower 10-year yields. Whether voluntary or not, Powell may have been nudged toward ending QT as a way to relieve some of the funding stress observed in Q4 2024.

To be clear, this isn’t QE—there’s no injection of liquidity happening. But the Fed shifting from being a net seller to now stepping to the sidelines marks a critical change in tone. Markets tend to react more to the rate of change than the direction itself, and this move gives the Fed optionality. If the current bear market tips into a full-blown recession, the Fed now has a sharper knife ready for extraordinary measures.

Liquidity Conditions Are Improving

Since mid-February, the Treasury General Account (TGA) has seen a significant drawdown—nearly $400 billion has flowed out, injecting fresh liquidity into the system. Initially, I assumed much of that would find its way back into the Fed via the ON RRP facility, but only around $125 billion has returned. That’s another positive sign for liquidity.

Meanwhile, key liquidity indicators are trending back toward comfort zones. The SOFR-IORB spread has normalized, and the triparty repo rate relative to ON RRP is approaching levels that suggest excess cash. This all points to a more abundant reserve environment and lowers the odds of a repeat of the 2019 repo crisis—at least for now.

Market Gauge of Liquidity – Is the Dollar Drop Doing the Heavy Lifting?

When assessing overall liquidity conditions, one of the most useful gauges is money growth. Recently, we’ve seen a pickup in money supply, largely driven by two key forces: strong private credit issuance and the year-over-year collapse in the U.S. dollar—now down roughly 4%.

Chart 1.a: U.S. Money Growth Is Accelerating