Fed Poised to End QT Next Week Amid Rising Market Strain

Two of Wall Street’s largest institutions, Bank of America and JPMorgan Chase, now expect the Federal Reserve to end its quantitative tightening (QT) program as early as next week — a process through which the central bank has been shrinking its $6.6 trillion balance sheet to drain excess liquidity from the financial system. The reason is simple: market stress is rising, and dollar funding costs are climbing faster than the Fed anticipated.

The Fed Is Hitting the Limits of Its Balance Sheet According to Bloomberg, the situation has shifted much faster than expected.

Both banks had previously projected that the Fed would end QT by December or even in early 2026, but the rapid spike in short-term funding costs and the decline in bank reserves have forced them to move up their timelines. Since 2022, the Fed has been unwinding Treasuries and mortgage-backed securities (MBS) to reduce its balance sheet from over $9 trillion to $6.6 trillion.

But according to strategists Mark Cabana and Katie Craig of Bank of America, the signs are clear: reserves are no longer “abundant.” “Money market conditions at current levels should tell the Fed that reserves are nearing their limit,” they wrote in a client note. In plain English: “Stop before something breaks.”

JPMorgan Warns: Market Stress Is Rising Teresa Ho, strategist at JPMorgan, added that markets are now operating with “significantly more strain” than expected, pointing to the exhaustion of the Fed’s reverse repo facility as a key warning sign. Other major institutions, including TD Securities and Wrightson ICAP, have also advanced their forecasts to October, while Barclays and Goldman Sachs still expect the tightening cycle to continue a bit longer.

Powell: “Reserves Are Nearly Sufficient” Fed Chair Jerome Powell recently left little room for doubt.

In his latest speech, he said the balance sheet runoff would stop once reserves are “somewhat above” the level considered sufficient — high enough to prevent financial instability. “We may reach that point in the coming months,” Powell said. Traders immediately interpreted that as code for “we’re nearly done,” fueling speculation that QT could end as soon as next week.

Data Shortage Complicates the Fed’s Decision The Fed is facing a major challenge: the government shutdown has cut off access to critical economic data.

Since early October, there have been no official updates on unemployment, retail sales, or other key indicators — leaving policymakers to navigate blindfolded ahead of their next rate decision. The situation worsened after ADP, one of the Fed’s private payroll data partners, ended its data-sharing agreement in August, further reducing visibility into labor market conditions. Economists warn that the Fed is now flying half-blind — forced to make pivotal monetary decisions with limited information.

Fed Turns to Alternative Indicators John Williams, President of the New York Fed, said the central bank is now relying on alternative surveys, including data from the Conference Board, Institute for Supply Management (ISM), and internal New York Fed reports.

These help track demand, prices, and business activity, but they cannot fully replace the comprehensive reports from federal agencies like the Commerce Department or Bureau of Labor Statistics. The only exception is the September Consumer Price Index (CPI), which will still be released this Friday after the Bureau of Labor Statistics temporarily recalled staff to ensure publication — necessary for calculating Social Security cost-of-living adjustments. Beyond that, most official data remains frozen.

Labor Market Weakness Adds to the Pressure The last available reports showed the slowest job growth since 2010, with unemployment among young people and minorities rising sharply.

The Fed must now determine whether this slowdown is temporary or structural. If weakness persists, the central bank may be forced to cut interest rates as soon as the next meeting — potentially lowering the federal funds rate to 3.75–4%.

Summary The Fed stands at a critical crossroads:

🔹 End quantitative tightening before market liquidity runs dry

🔹 Decide policy amid a data blackout caused by the government shutdown

🔹 Maintain financial stability without undermining investor confidence

Economists agree that the Fed is walking a fine line — and as Bank of America put it: “It’s better to stop too early than too late.”

#Fed , #JeromePowell , #WallStreet , #economy , #MarketVolatility

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