The Fed pivot no one’s talking about

Despite the action-packed June FOMC meeting last week, there was very little talk about the major shift in balance sheet policy by the Fed that began this month.

After running the balance sheet up from $4 trillion to $8.9 trillion during the COVID-era quantitative easing campaign, the Fed has been employing quantitative tightening since 2022 to decrease the size of its balance sheet and lower the total amount of bank reserves within the system.

There are two ways QT can work: “soft” or “hard.” 

QT “soft” is when the Fed does not actually sell the assets on its balance sheet to a market participant, but rather lets the securities (a combo of Treasurys and mortgage-backed securities) mature and “roll off” its balance sheet. They take the proceeds of the security and retire that cash instead of reinvesting the proceeds into more of the same security that matured as a way to “stay even.” 

QT “hard” is when a central bank actually sells its securities to dealers and other market participants. It is a much more potent and effective version of QT as it leads to increased sell pressure, causing higher yields in turn. The Bank of England currently employs this method, but the Fed never has. 


The Fed has a simple framework for understanding reserve levels: We are currently in a regime of “abundant reserves,” characterized by more reserves than what is required for the financial system to effectively operate. The Reverse Repo Facility has a $100 billion+ balance sheet, i.e., abundant reserves. 

The Fed wants to get to an “ample reserve regime,” which allows a buffer to the reserve level so that no hiccups occur in the deep parts of the Fed’s plumbing system.

In 2019, the last time the Fed did QT, reserves hit $3.7 trillion and the Repo market blew up since there were not enough reserves within the system to effectively operate. The situation is known as a “scarce reserve regime.” Repo rates exploded higher, forcing the Fed to end QT overnight and begin lending in Repo markets. 

To avoid this happening again, the Fed is preemptively tapering the pace of its QT despite no signs of stress in the plumbing markets of the Fed. A simple way to view this “stress” is looking at the spread between SOFR and IORB — as long as it’s negative, there is no concern for reserve levels:


Despite this lack of stress, the Fed is slowing down its QT significantly. Starting this month, the Fed is lowering the runoff from $60 billion per month down to $25 billion per month. 

This taper in the pace of QT will lead to the Fed’s balance sheet flattening out after nearly two years of down-only, easing pressure on liquidity.


Freeing up this amount of pressure on risk assets is setting up for a much more positive liquidity environment than the one from the past couple of years. Buckle up.
Felix Jauvin



The number of virtual currency-related applications New York’s Division of Financial Services has so far approved this year. The most recent of which happened on Monday, when crypto trading firm Cumberland said it secured a coveted BitLicense. 

“As one of the only principal trading firms to hold a BitLicense, we look forward to strong trading relationships with institutional New York counterparties,” the company noted in an X post. It did not return a request for further comment. 

WisdomTree and PayPal were granted what is known as limited purpose trust charters in March and May, respectively. Though similar to a BitLicense, those charters (under the New York Banking Law) include other benefits, such as allowing recipients to engage in money transmission in New York without obtaining a separate license.

Otherwise, the last BitLicense recipient before Cumberland was eToro in February 2023. Coin Cafe also received one the month before that.