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MOOSPEAK: OCT17.2025
A FED PIVOT
Philadelphia, PA – OCT 14, 2025 – In a speech before the National Association for Business Economics (NABE) this week Fed Chair Jerome Powell signalled that the central bank's program of quantitative tightening (QT) may be "coming into view" for its conclusion. Interpreted by many as a dovish pivot, the remark sent a blast of optimism through financial markets. Investors quickly reacted to the prospect of eased financial conditions, with equity markets paring last week’s losses and bond yields declining amid anticipation of easier monetary policy and a more favorable environment for risk assets.
The Federal Reserve has been reducing its balance sheet since it began QT in June 2022, following its unprecedented Quantitative Easing (QE) during the pandemic in support of the economy. The idea behind QT was to remove liquidity from the financial system, aiming to curb inflation alongside interest rate hikes. The precise timing of QT’s conclusion remains indefinite, but according to Powell the Fed "may approach that point in coming months." The idea is to halt the runoff once reserves are somewhat above the level the Fed judges “consistent with ample reserve conditions”. Presumably, they will know it when they see it.
Ending QT signals more accommodative financial conditions-- lower interest rates and increased market liquidity, which is why we saw markets do an immediate 180, switching from risk-off to risk-on this week. US stocks were up, international stocks were up, US bonds were up, the Dollar weakened and Gold surged.
Looking at our sector winners and losers, companies operating in high-growth sectors, particularly technology, stand to be major beneficiaries. These firms often rely heavily on debt financing to fuel their expansion, research, and development initiatives. Lower interest rates mean reduced borrowing costs, greater profitability, and more attractive discounted earnings streams. In addition, increasing liquidity in capital markets yields easier and cheaper access to capital for these companies.
The real estate and home construction industries are also poised for a significant take-off. A lower-rate environment stimulates housing demand by making mortgages more affordable, leading to increased home sales and construction activity. That could extend to building materials and construction equipment firms.
Essentially, the potential conclusion of QT, marks a shift in favor of growth and cyclical sectors and away from sectors that rely on higher interest rate differentials or defensive positioning. Defensive sectors like consumer staples, food and beverage, and dividend reliant companies like utilities will take a back seat to technology and telecom. Large banks could face pressure on their net interest margins.
While easier money may stimulate growth, it can also foster financial vulnerabilities. As we saw in 2008, excess credit and compressed risk premiums can lead to a global financial disaster. A severe correction in the US market, potentially triggered by unsustainable fiscal policies or speculative investments could precipitate a global recession, potentially leading to significant losses for foreign banks, institutional investors, and sovereign wealth funds with exposure to US equities.
There is a natural knee-jerk temptation to view the elimination of QT as a bullish development. In fact, the Fed began eliminating QT in 2022, and the US stock market returned over 25% per year in both 2023 and 2024… without eliminating QT. Those market gains were mostly due to excess fiscal stimulus, of course. The point I would make is that eliminating QT altogether is akin to saying that we are at a point in time when the economy is so weak that reducing Fed reserves any further would be unwise. Thinking about it, that is hardly a bullish sentiment. It may prove bullish six to nine month out, once we’ve acted, but like the perceived need to cut interest rates, it is a decision inherently rooted in pessimism.
