Month-End Volatility Drives Surge in Fed’s Liquidity Tools

The Federal Reserve (Fed) is facing growing liquidity concerns as it considers ending its bond reduction program, highlighting challenges for its balance sheet management, according to a Reuters report.

Since peaking at roughly $9 trillion in 2022, the Fed’s holdings of Treasuries and mortgage-backed securities have been drawn down to about $6.6 trillion. 

The process known as quantitative tightening (QT), involved allowing assets to mature rather than actively selling them. 

However, a sharp uptick in money-market rates, including a rise in the federal funds rate beyond expectations, and increasing use of the Fed’s Standing Repo Facility have raised questions about whether liquidity in financial markets is sufficient for the QT process to continue safely. 

For example, the repo facility’s increased usage signals tighter conditions than the Fed anticipated. 
With the Fed’s policy-setting body, the Federal Open Market Committee (FOMC), scheduled for a meeting this week, markets are expecting an announcement to end the drawdown phase and potentially signal a shift back toward expansion. 

While the QT pace is already sluggish, the Fed may face pressure to intervene with temporary operations or even resume asset purchases in early 2026 should liquidity strains persist. 

In addition to the normal maturity run-off of assets, the Fed retains tools such as the repo facility and open market operations to manage reserve levels and ease stresses. 

Historically, the last cycle of drawdown ended prematurely due to overshooting liquidity targets, a cautionary precedent for current policymakers. 

As the Fed approaches the likely end of QT, the decision will hinge not only on its policy rate-setting priorities but also the resilience of money markets in absorbing the removal of reserves. 

How smoothly the balance sheet transition is managed may influence broader funding conditions for the U.S. financial system in coming months.