A rigorous macro-financial research paper analyzing the effects of the Federal Reserve’s quantitative tightening (QT) cycle and its eventual halt on global financial markets. This report investigates how balance-sheet contraction reshaped liquidity conditions, funding markets, equity volatility, and risk appetite from 2019 to 2025.
Using advanced econometric tools—including VAR impulse-response functions, Granger causality tests, rolling correlations, event studies, and difference-in-differences analysis—the paper demonstrates a strong liquidity–volatility transmission channel. It shows that reductions in the Fed’s balance sheet causally increased market volatility, tightened funding conditions, and suppressed equity performance, while the 2025 QT pause triggered a rapid reversal in market stress.
The report positions balance-sheet policy as a second, and often more powerful, monetary policy instrument than interest rates, with significant implications for central banks and investors alike. It concludes with concrete policy insights and portfolio strategies for navigating liquidity-driven market regimes in the post-QT era.