After several years of quantitative tightening, the Fed is restarting QE amid persistent market and policy pressures.December 2025 marks the official end of the largest cycle of quantitative tightening the Federal Reserve has ever undertaken.From a peak of $8.93 trillion in June 2022, the Fed has allowed $2.4 trillion in maturing assets to roll off its balance sheet. But Chair Powell announced on December 10 that the Federal Open Market Committee (FOMC) has decided it must begin expanding its balance sheet again to maintain “ample reserves”—code for maximizing policy discretion and insulating itself from market forces.
Before the Global Financial Crisis (GFC), the Fed conducted monetary policy primarily through open market operations. Raising its target interest rate—the rate in the overnight interbank lending market—required the Fed to sell bonds from its balance sheet until the supply of reserves contracted enough to push up the federal funds rate (FFR). Conversely, lowering the target rate required purchasing bonds until reserves expanded sufficiently to pull the FFR down.Another feature of this approach was that the Fed also “defended” its target against changes in market conditions. If demand for reserves (liquidity) increased in private markets, the Fed would respond by increasing the supply of reserves through additional bond purchases. In this framework, the Fed both engaged with and responded to private markets.