LPL: The End (of QT) Is Nigh

Is the End of Quantitative Tightening Near? What It Could Mean for Markets

By Evaluator Funds Research Team

Based on insights from LPL Research and Lawrence Gillum, Chief Fixed Income Strategist (October 2025)

Summary

Recent comments from Federal Reserve Chair Jerome Powell suggest that the Fed may soon conclude its quantitative tightening (QT) program — the ongoing effort to reduce its balance sheet and drain excess liquidity from the financial system.

Since QT began, the Fed’s balance sheet has declined by more than $2 trillion, primarily through the overnight reverse repo (O/N RRP) facility. However, as that balance approaches zero and bank reserves dip below $3 trillion, the Fed faces a potential tipping point. The last time reserves became too scarce — in 2019 — short-term lending rates spiked, forcing the Fed to step back.

Analysts believe the “comfortable” level of reserves lies between $2.7 and $3.0 trillion, but uneven reserve distribution among banks could push that threshold higher. To avoid another liquidity crunch, policymakers are likely preparing to pause QT in the coming months.

Meanwhile, the Fed continues working toward a Treasury-focused balance sheet, gradually reducing its exposure to mortgage-backed securities (MBS). However, with mortgage rates at multi-decade highs and slow repayment activity, MBS holdings—many maturing in the 2050s—remain stubbornly large. Unless mortgage rates fall significantly or the Fed sells MBS outright (an unlikely move), this rebalancing will take years.

What It Means for Investors

When QT ends, the Fed will likely return to buying bonds to maintain reserve levels — a shift that could stabilize short-term funding markets and support fixed income prices. For investors, the transition away from tightening and back toward a more neutral or even accommodative stance could mark a turning point for bond market performance.

At Evaluator Funds, we continue to monitor Fed policy shifts closely as part of our ongoing commitment to helping investors navigate changing market conditions.

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