The Fed Ends QT: What it Means for Markets

Key Insights

The Fed Just Announced it is Ending Quantitative Tightening  

This policy move will result in an improvement to the financial system’s liquidity backdrop. First, what is quantitative tightening (QT)? During QT, the Fed allowed a set monthly amount of Treasuries and mortgage-backed securities to mature each month. This, in turn, reduced the central bank's holdings of these securities and decreased reserves in the banking system. So why will the Fed terminate QT on December 1? Mainly to address signs of mounting stress and elevated volatility in money markets. With the understanding that there is a clear relationship between developments in money markets and banking system liquidity, the Fed would have taken notice that bank reserves have declined substantially over the past few weeks — to their lowest level since late 2024 — squeezing liquidity. The end of QT will improve liquidity in the financial system. 

Looking back, QT was put in place in mid-2022 to reduce the Fed’s balance sheet as part of a broader policy normalization to unwind the large liquidity stimulus implemented in response to the pandemic.

A Bullish Market Signal in the Short Term 

This policy move is likely to send tactically bullish signals for both fixed income and equities. On the rates side, expectations for an improved liquidity backdrop are likely to push market rates lower. On this basis, it is entirely possible that we may decisively break the 4% level in 10-year US Treasuries to the downside. In other words, the near-term market backdrop may be turning more supportive of long US duration. Beyond rates, the end of QT is also likely to boost appetite for riskier assets. These include IG and HY credit in fixed income as well as US equities. Reflecting the impact of potentially lower rates, we believe that the more interest-rate sensitive sectors — including consumer discretionaries, utilities or real estate — as well as the more interest-sensitive factors — such as small caps or growth — may benefit the most from the Fed’s policy shift. Finally, another market implication of the end of QT may be renewed downward pressure on the USD in the near term. 

The views expressed herein are those of the MFS Strategy and Insights Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at anytime and should not be construed as the Advisor's investment advice, as securities reccomendations, or as an indication od trading intent on behalf of MFS. No forecasts can be guaranteed.

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