Fed: The End of Monetary Tightening Marks a Turning Point for Markets

A Cautious Shift Amid Market Tensions

The much-anticipated announcement marks the end of a historic cycle. Since the summer of 2022, the Fed has been reducing its bond portfolio under the framework of Quantitative Tightening (QT), the exact opposite of the Quantitative Easing (QE) conducted during the pandemic. In three years, the size of its balance sheet has shrunk from nearly $9 trillion to a little over $7 trillion, withdrawing more than $2 trillion in liquidity. The goal was clear: to normalize monetary policy after the excesses of post-COVID support.
However, in recent weeks, several signs of stress in the US money market have concerned operators. The cost of short-term financing has risen, US Treasury issuances have pressured long-term rates, and the spreads between Treasury securities and corporate bonds have slightly widened. In this context, the Fed has opted to adjust its course.
“Financial stability now takes precedence over fiscal rigor,” summarizes Lazard Frères Gestion in its latest note.
Specifically, the central bank will stop letting its bonds expire without replacement and will begin reinvesting the amounts as they mature, thereby stabilizing the overall liquidity of the system. At the same time, it has lowered its benchmark rate by 25 basis points, marking the first instance since 2023.

Subtle Support for the US Treasury

Beyond symbolism, this decision aims to prevent a liquidity shortage that could weaken bond markets and regional banks. According to Lazard's estimates, the Fed could purchase up to $200 billion in Treasury securities annually, focusing on short-term maturities. This intervention is not a return to QE: it does not create net liquidity but stabilizes the existing stock. However, it indirectly eases the burden on the US Treasury, which faces a surge in financing needs.
By reducing pressure on long-term rates and smoothing demand for public bond issuances, the Fed acts as a « discreet backstop » for the bond market. This pragmatic approach follows a logic of prevention: avoiding a repeat of the September 2019 scenario, when a rapid withdrawal of liquidity led to a spike in interbank rates and a repo market freeze.
For the markets, the message is clear: the US central bank wants to prevent any system disruption at a time when growth is slowing and employment begins to soften.

Toward a More Accommodative Interest Rate Environment

This monetary shift initiates a new phase. After two years of simultaneous rate hikes and balance sheet tightening, the Fed is adopting a more balanced approach. However, it does not foresee a rapid rate cut, but rather is laying the groundwork for sustained stabilization. The scenario favored by Lazard Frères Gestion is a soft landing for the US economy, with inflation gradually returning to 2.5% and growth settling around 1.5% by 2026.
For investors, this inflection changes the landscape. Easing short-term rates could support equity markets and boost sectors sensitive to liquidity, such as listed real estate, infrastructure, and private debt. Medium-term US Treasury bonds (2 to 5 years) present an attractive profile again, while the still-inverted yield curve may gradually normalize.
The Fed's implicit message is clear: it no longer wants to be the cause of a liquidity crisis. In an unstable geopolitical environment and with a fragile fiscal backdrop, monetary stability once again becomes a top priority.