On December 1, the Federal Reserve concluded its Quantitative Tightening (QT) strategy. This decision occurred even though the process was far from complete.
In our experience, incomplete actions lead to ineffective outcomes. In this case, it assures that consumer prices are unlikely to return to their pre-COVID levels.
As it stands, stocks, gold, and, until recently, bitcoin are reaching new heights. What implications does the cessation of QT have for these assets? To better understand this, we must reflect on the extensive monetary influx from 2020 to 2022.
During that period, central authorities imposed lockdowns under the guise of a pandemic. They suggested that if everyone isolated for two weeks, we could ‘bend the curve’ and curb the spread of the virus.
This notion, as it turned out, was misleading. The reality was that the virus posed no greater threat than the common flu.
However, those in power reveled in restricting individual freedoms, leading to prolonged lockdowns, mandatory masks, and repeated vaccinations. A significant portion of the public complied willingly.
The economic shutdown resulted in numerous issues, notably disrupting supply chains and reducing incomes. To offset these financial losses, the Federal Reserve shifted into high gear, implementing mass Quantitative Easing (QE).
The Fed not only decreased the federal funds rate to zero but also generated $5 trillion in credit out of thin air. This created credit was used to purchase substantial amounts of U.S. Treasury bonds and mortgage-backed securities (MBS).
The government utilized this influx of credit to issue stimulus checks. Concurrently, 30-year fixed-rate mortgages dipped to just 2.5%, igniting a housing bubble.
Binge and Purge
The goal of QE was to infuse liquidity into the financial system, stabilize declining markets, and lower interest rates further. The scale of this endeavor was unprecedented. The Fed’s balance sheet, which stood at $4 trillion before the pandemic, swelled to nearly $9 trillion by spring 2022.
In parallel to restricting production while inflating the money supply, central authorities propelled consumer price inflation to its highest level in 40 years. This flood of cheap money also fueled today’s asset bubble.
Stocks reached unprecedented highs, sparking an AI craze. Real estate prices surged, locking out many from achieving home ownership. Bitcoin and the broader crypto market were inundated with extreme speculation.
When capital is abundant and inexpensive, it inevitably flows toward high-risk investments in pursuit of greater returns. Throughout this period, Fed Chair Jerome Powell assured the public that rising consumer prices were merely ‘transitory.’
By June 2022, the rampant inflation could no longer be overlooked by the Fed. The response entailed interest rate hikes followed by QT.
However, QT is inherently a slower process than QE. It involves a gradual reduction of the Fed’s massive balance sheet. Instead of outright selling bonds, the Fed stopped reinvesting the proceeds from maturing bonds.
As a result, each month a predetermined quantity of Treasuries and MBS would “roll off” the balance sheet. This mechanism effectively siphoned reserves out of the banking system and absorbed excess liquidity from the wider economy.
The New Baseline
For the past three and a half years, the Fed’s liquidity drain has been in motion, yet only about $2.4 trillion was withdrawn—not even half of the credit created during 2020-22. Ultimately, the balance sheet contracted from $9 trillion to approximately $6.6 trillion, which is still significantly above the $4 trillion level from January 1, 2020.
This tightening phase was expected to have a more pronounced effect on risk assets. A reduction in liquidity typically leads to tighter financial conditions, higher borrowing costs, and diminished enthusiasm for speculation. Yet, aside from some choppy movements in the bond market, most assets endured or even rose.
Indeed, stocks faced a challenging year in 2022. However, once the AI boom took off, the stock market surged. Residential real estate experienced some stagnation and declines in specific areas, yet home prices largely remained elevated compared to pre-2020 values.
Now, despite the heightened levels of both consumer and asset prices, December 1, 2025, marks the official end of QT.
What prompted this abrupt halt before completing the full course?
According to official statements, bank reserves are now regarded as “ample,” allowing the Fed to cease QT without causing market instability (unlike the short-term funding issues experienced in 2019). The central authorities believe the balance sheet, which shrank from $9 trillion to $6.6 trillion, remains stable at this historically elevated level. In short, $6.6 trillion now serves as the new baseline.
It’s important to note that ending QT does not equate to initiating QE. For the time being, the Fed is not actively creating new credit; instead, it is reinvesting all principal payments from maturing securities into the market, focusing on short-term Treasury bills.
This alters the composition of the balance sheet without immediately changing its overall size, and it also aids in financing the substantial debt accumulated by Washington.
Is the End of QT a Green Light for an Asset Rally?
While the conclusion of QT doesn’t equal the commencement of QE, it represents a significant shift toward a more accommodative stance. This aligns with the Fed’s rate-cutting cycle that began on September 18, 2025.
Will investors interpret the end of this tightening phase as a signal to reengage with risk assets, even if it’s merely a tactical adjustment rather than a full-scale QE revival?
With less liquidity strain and expectations of future rate cuts (with strong probabilities for a December cut), a favorable momentum emerges. Companies that depend on inexpensive financing for expansion, particularly tech-driven growth stocks, are likely to see gains. The NASDAQ and S&P 500, potentially buoyed by a year-end rally, could reach new record highs by year’s end.
Gold, having recently dipped below $4,000, rebounded to around $4,200 per ounce at the last check. As the Fed moves toward a more lenient monetary approach, real interest rates (nominal rates adjusted for inflation) are expected to decline. Given that gold does not yield interest, its opportunity cost diminishes, enhancing its allure.
With the Fed easing and ongoing global uncertainties, we anticipate gold will continue its upward trend, serving as a critical hedge against both monetary depreciation and geopolitical risks.
Bitcoin, after experiencing a sell-off over the past two months, is likely where the most excitement will unfold. According to Fundstrat’s Tom Lee, following the last QT cessation, the crypto market rallied roughly 17 percent within three weeks.
In conclusion, the Fed has prematurely wrapped up QT. While this doesn’t mark the start of a new round of QE, it undeniably reflects a shift from tightening to a more lenient approach.
Invest wisely, manage your risk, but recognize that the trajectory for assets like stocks, gold, and bitcoin has just turned upward.
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Sincerely,
MN Gordon
for Economic Prism
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