By: Michael Sellers
Partner, Portfolio Manager
The Federal Open Market Committee is widely expected to lower the benchmark interest rate by 25 basis points at its December 9-10 meeting. In anticipation of the meeting, Fidelis Capital’s Head of Fixed Income Chris Gunster outlined why markets are pricing in a cut for his latest Forbes column, which you can read here.
What to Expect from the Fed Next Week
In addition to the expected rate cut next week, the Fed announced at the October 28-29 meeting it would be ending the quantitative tightening program on December 1. As recently as September, the Fed indicated it wouldn’t end QT until early 2026.The goal of QT was to reduce the Fed’s balance sheet, which peaked at roughly $9 trillion in 2022, in order to allow the Fed more control over reserve conditions and short-term lending rates. Since the initiation of QT, the Fed has withdrawn roughly $2.4 trillion from the financial system, leaving the current Fed’s balance sheet at approximately $6.6 trillion.
Source: Board of Governors of the Federal Reserve System (US) via FRED®
The move to end QT coincides with concerns about recent jumps in short-term funding markets, specifically the spikes in overnight repo rates at the end of both October and November. The overnight repo market is a critical source of liquidity for a wide range of financial institutions, and sudden increases in rates can be interpreted as an early sign of stress within the system. To learn more about the short-term funding market, watch this 3-minute video with Partner Paul Trippe for a baseline explanation.
While we don’t view episodic stress in the funding markets as a reason for panic, we are encouraged that the Fed isn’t tied to a predetermined course of action in its reserve management. Effectively, the lending markets are telling the Fed that it’s a good time to end the liquidity removal that is QT.
Does the end of QT mean we imminently expect another round of quantitative expansion? The answer from our perspective is no—at least not yet. Although some prognosticators are predicting the Fed will resume QE sometime in 2026, we view the earlier-than-expected end to QT as a signal the Fed is committed to staying flexible and data dependent on its monetary easing path.
Essentially, the Fed now has another option for easing financial conditions. It’s no longer just a rate cut story. The end of QT also signals the Fed is being mindful of liquidity levels within the system, and it isn’t shy about changing course if necessary.
