📈Understanding the Slowdown in QT (Fed's Liquidity Reduction)

I've seen a lot of confusion regarding the QT slowdown. Is it really stopping? Just $5B per month? In reality, it's still $40B, but it has a positive impact on short-term liquidity. Let’s break it down in simple terms:

### What happened yesterday?

The Fed holds Treasuries of various maturities and mortgage-backed securities (MBS) on its balance sheet. Here’s what changed:

- The Fed lowered the monthly cap on Treasury reductions from $25B to $5B (starting **April 1, 2025**).
- The cap for MBS reductions remains unchanged at $35B per month.

As a result, QT remains at $40B per month, but only $5B now comes from Treasuries, which impacts short-term liquidity.

The Fed never intended to halt QT entirely for MBS, as it has long stated its goal of fully exiting the MBS market. These securities were massively purchased during the 2008 financial crisis and COVID to support the housing market. However, MBS affects mortgage rates, not risk assets.

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### Why does QT slowdown matter for markets?

Reducing Treasury sales slows the outflow of liquidity from financial markets.

During QT, the Fed allows bonds to "mature" without reinvesting the money into new securities:

- When the Fed buys bonds, it's like lending money to the U.S. government.
- When a bond matures, the government must repay the money. Since it doesn’t have extra cash, it issues new bonds to borrow from investors → money exits the system.
- If the Fed reinvested this money into new bonds, liquidity would stay unchanged.
- But with QT, the Fed does NOT reinvest, causing liquidity to disappear.

Now, instead of $25B disappearing monthly, only $5B does. This leaves an extra $20B in the system, easing pressure on markets.

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### What does this mean for markets?

- The Fed gave markets more time to adjust. This is the most dovish move possible without cutting rates.
- Powell reaffirmed that inflation is temporary and that cutting rates now could trigger recession fears.
- Slower QT will help markets navigate potential risks related to the U.S. debt ceiling.

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### Key Takeaways

✅ Positive for liquidity, but not full risk-on mode yet.
✅ A clear signal from the U.S. Treasury is still needed for strong market growth.
✅ **Patience is key**—we may have already seen local market bottoms.