The US Federal Reserve is all set to announce its monetary policy decision on Oct. 29, after a two-day review meeting to deliberate on the central bank's benchmark interest rate verdict and the state of the US economy. The market has baked in a quarter point cut this week, bringing the federal fund rate to a range of 3.75%-4.00%. With the rate cut expected, Wall Street has turned its attention to the Fed's balance sheet management.
According to experts, a possible end this week to the US Fed's "quantitative tightening" policy may offer a boon to the US government. Most market watchers assumed quantitative tightening - letting bonds roll off the Fed's balance sheet - would continue through early 2026. However, Fed Chair Jerome Powell flagged a likely end to the whole QT process in the "coming months".
An unexpected and volatile rise in the money market rates, including an upward drift in the federal funds rate, has motivated analysts to call for the US Fed to end the shrinkage of its bond holdings. Powell's indication came after heavy government bill sales triggered a change in the money market system.
How will quantitative tightening help US Fed?
The end of QT may help facilitate the government's current funding strategy that has been in place since mid-year and has seen Treasury rely more heavily on short-maturity bills of 12 months or less. According to news agency Reuters, the share of Treasury bills in the ever-expanding US debt stack is set to jump above historical averages and hit 25% by year-end.
An imminent end to QT may smooth this process by allowing the "steady state" of the Fed's balance sheet to tilt more toward bills over time, leaving the US Fed and Treasury well-aligned. As it stands, bills are only just over 16% of the Fed's balance sheet, whereas Treasuries of 10-year maturities or more make up 38% and one-to-five-year tenors account for 34%.
After more than doubling the size of its balance sheet with aggressive purchases of Treasury bonds and mortgage-backed securities as a stimulus tool during the COVID-19 pandemic, the Fed has reduced the size of its holdings from a peak of about $9 trillion in 2022 to the current level of $6.6 trillion.
How will an end to balance sheet runoff impact Wall Street?
Brad Bernstein, managing director at UBS Private Wealth Management, told Reuters that while investors are expecting a quarter percentage point rate cut from the Fed on Wednesday, "the most important thing the market is watching for" is what the central bank "will do with its balance sheet."
According to Bernstein, the US Fed may announce an end to runoff of securities on their balance sheets. To be clear, every month, billions of dollars mature in Treasuries and mortgage-backed securities. ''They've been allowing a lot of that to runoff, reducing their balance sheet. They may announce that's going to end before the end of the year.''
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October 23, 2025The Wall Street expert believes that will be a positive catalyst for markets going forward and in the next year. The balance sheet is a major way that the Fed impacts interest rates in the economy. ''They control the discount rate and they control their balance sheet. It has been in a tightening bias up until now," said Bernstein.
"If the Fed stops the balance sheet runoff, they're going to be a buyer of tens of billions of Treasuries every month, effective immediately, which will support the market. It also directly impacts the way banks have a direct access to liquidity and capital. So, its very important for markets and the economy that the Fed, in the near future, stops the tightening of its balance sheet," he concluded.
US Fed policy verdict: How will it impact D-Street?
According to Jigar Trivedi, Senior Research Analyst at Reliance Securities. markets currently “almost certain” (around 95-98% probability) expect the Fed to cut the federal funds rate by 25 basis points at the October meeting, bringing the target range to 3.75%-4.00%.
AdvertisementThe labour market is showing signs of softening, private data indicate job growth has slowed materially, and Fed Chair Jerome Powell has himself said that downside risks to employment appear to have risen. Inflation, while elevated relative to the Fed's 2% target, has shown some moderation (e.g., headline CPI rose 3.0% in September year-on-year).
"That gives the Fed some room to ease. Despite the expectation of a cut, the Fed is signalling caution: It consistently emphasises “meeting-by-meeting” data dependence, and some officials remain wary about cutting too fast given inflation risks," said Trivedi.
According to analysts, market expectations are very high for the cut and for multiple cuts this year; if the Fed disappoints (by cutting less or signalling fewer cuts) markets could react negatively (in equities, bonds, risk assets).
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