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🤔 Fed signals end of QT? The Federal Reserve Minutes for the January FOMC meeting have just been released. This gives us more insight into how the Fed is thinking. And there's some big clues about the future of QT. Here's everything you need to know - in simple terms... ⭕️ Deciphering "Fed Minutes" The Fed always likes to "signal" big changes to the market before they are implemented. Make no mistake - we just saw a big signal about Quantitative Tightening (QT). Fed Minutes are not so much "Minutes", more sanctioned "guidance" for markets. The wording must be approved by all members of the FOMC, and it's used as an extra tool to guide markets. ⭕️ What specifically did the Minutes outline? Here's the key passage in full: "Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event." So the specific wording is "pausing or slowing" - due to "debt ceiling dynamics" (more on this soon). There is no explicit mention of "ending". However, I'm cynical enough to believe that if QT is "paused", it probably won't be turned back on again. Before the release of these latest Minutes, primary dealers were already expecting an end to QT around Q2 or Q3 2025, so it was likely coming anyway. ⭕️ What would this mean for asset markets? Asset markets like liquidity. Stopping QT is not really much of a direct liquidity impulse. However, it is "liquidity positive", because it halts downward pressure on Fed Liquidity and bank reserves. QT is currently running at a constant pace of roughly $55bn per month, so that's $55bn worth of liquidity drain per month. Stopping QT would stop this consistent liquidity drain and would accentuate any positive effects from other liquidity-altering facilities at the Fed, like the Reverse Repo and the Treasury General Account. ⭕️ Please, do not expect imminent "turbo" QE There's a prevailing sentiment from some people on X that ending QT means a swift return to the type of "turbo QE" we have seen in the past. This is just not true. My view is that we are unlikely to see this kind of very large and explicit QE without a catalyst. (Epic stock market crash, Treasury market "freak-out", financial crisis, war, pandemic or similar black swan) It has been the Fed's plan for a long time that when QT ends, the balance sheet will grow very slowly alongside the pace of GDP. Effectively keeping reserves as a percentage of GDP "flat". However, let's be clear - more liquidity is always coming. This is due to the gargantuan amounts of debt in the world. And this debt needs to be refinanced. There are still a few "liquidity levers" that can be pulled by policymakers before turning back to big QE. One of those levers is an adjustment to the Supplementary Leverage Ratio (SLR). In very simple terms, this means stuffing a lot more Treasuries onto the balance sheet of commercial banks. And this topic has suddenly re-emerged in Fed speech in recent weeks... ⭕️ So, what are these "debt ceiling dynamics"? The recently released Fed minutes mentioned "debt ceiling dynamics". These dynamics affecting the Fed's "line of sight" on bank reserves is something I have written about before. But before we look at this, let's quickly run through what bank reserve scarcity is. To gauge reserve scarcity, you can look at bank reserves as a percentage of GDP, or bank reserves as a percentage of Total Bank Assets. Either way, they both dropped to multi-year lows in late December 2024 during the end-of-year liquidity squeeze I outlined at the time. As reserves have fallen in recent months, there has been some stress in boring but important dollar funding markets including SOFR (Secured Overnight Financing Rate). If things are "running smoothly", SOFR should not be spiking above the "Fed Funds corridor". What the Fed does not want is a re-run of the 2019 Repo Crisis. In September 2019, reserves became so scarce that a massive dollar funding panic ensued, sparking a worldwide market panic and forcing the Fed to abruptly stop QT and transition to a light form of QE. There are three "levels" of reserve scarcity according to the Fed: 1⃣ Abundant (high) 2⃣ Ample (just right) 3⃣ Scarce (too low) The lower reserves fall, the closer we get to "scarce". Nobody really knows for sure where these levels actually are. The Fed attempts to guesstimate, and uses various measures to do so. According to Powell at the latest FOMC in January, reserves are still currently "abundant", although I'm not sure I agree with him. The Fed wants to get reserves down to "ample" and keep them there, avoiding a dip into "scarce". ⭕️ Back to "debt ceiling dynamics" The "debt-ceiling induced" drawdown of the Treasury General Account (TGA) started last week (big detail on this in the quoted post below). This likely means we will see an increase in reserves until a debt-ceiling resolution, which will happen at some unknown date between now and probably some point in August (the "X-date"). Once we get a debt-ceiling resolution, we will then likely see a rapid decrease in reserves as the TGA is "refilled". If QT continues to "run in the background" throughout the debt-ceiling showdown period, the $55bn per month reserve drain from QT would essentially be "covered up". And it would then reveal itself as the TGA is rapidly refilled. Meaning reserves might be at risk of dipping meaningfully below the most recent end-of-December low shortly after the debt-ceiling showdown is resolved. So these debt ceiling dynamics essentially "muddy" the Fed's view on reserve scarcity.