Ample Reserve, QT and the Future of the Fed Balance Sheet

If you missed the best recent articles:

• Tesla: Billion-Dollar Gamble with Autonomous Vehicles and Robots

• Liquidity Crisis: Yes or No

• Nobel 2025: Republic of Knowledge - Republic of Knowledge 2.0

• US Banks Q3/2025: When Wall Street Accelerates Again

• Gold: Debasement Trade and the Era of Uncertainty

• What Factors Affect Mortgage Rates?

• Argentina and Dollarization

“Every banker knows that if he has to prove he is worthy of credit, however good may be his arguments, in fact his credit is gone.”
— Walter Bagehot, Lombard Street (1873)

(Excerpt from the most legendary bedside book in the history of modern central banking and finance thought)

Nearly 150 years later, that statement still holds true. Whenever the Fed has to prove that the system still has “ample” liquidity, liquidity has actually run dry.

There are systems that don't die from lack of money, but from money no longer flowing to the right places.

Since after 2008, we've been used to an America with “excess liquidity”: QE after QE, Fed balance sheet ballooning from under 1,000 billion USD to over 8,000 billion USD, banks flooded with reserves, money market funds parking trillions in ON RRP. Textbooks began talking about a “new regime” – the era of Ample Reserve – where the Fed can control interest rates just by a flick of the wrist in the IORB – ON RRP corridor without needing to pump – drain every morning like in the scarce reserve days before GFC.

But by October 2025, that model that seemed as solid as bedrock began to creak. ON RRP – the “buffer reservoir” that once held 2.5 trillion USD – nearly drained. SOFR started trading tight, then occasionally spiked above IORB – something that in theory floor system only happens when reserves have reached the efficient level. By month's end, liquidity hotspots reappeared: dealers couldn't turn money, MMFs had no buffer left, banks had to knock on the Fed's Standing Repo Facility door. That's no longer technical fluctuations. That's the signal: Ample Reserve system is hitting the ceiling.

The irony is that the Fed didn't hit the ceiling because of “sucking too hard” but because fiscal sucking up too much. When the Treasury has to issue debt to fund deficits over 7% GDP, each new T-bill issuance is like a vacuum suck into the banking system: money flows to TGA, reserves contract, repo strains. If RRP is still thick, pain isn't felt. But when RRP is down to 0, every USD drained hits reserves directly. At that point, the Fed no longer asks: “We want to shrink the balance sheet to what extent?” but must ask: “The system can withstand how much more without repeating 2019?”

That's why, the FOMC's October 2025 decision to stop QT is not a pivot, not “Fed U-turn”, and certainly not “starting new QE”. It's a maneuver to protect liquidity infrastructure. The Fed stopped not because they beat inflation, but because they saw exactly what Lorie Logan warned about: “Money market rates have risen to, and sometimes above, IORB — signaling that reserves have reached an efficient level.” In plain English: hit the floor already, withdraw more and the pipe bursts.

And this is the most important point of the week: when the Ample Reserve system had to stop QT just because repo started creaking, the question is no longer “Can the Fed continue shrinking the balance sheet?”, but “from now on, how will they manage the balance sheet to both support repo, support fiscal, and not be accused of QE?”. That's when the concept Quantitative Optimization (QO), terminal balance sheet, and deals that sound very harmless like Reserve Management Purchases takes the stage. The Fed won't print money en masse, but buy T-bills in drips, open the repo valve at the right time, gradually withdraw long-term MBS, rebuild a balance sheet less “political” but more “liquidity technical”.

This week, Viethustler will walk you through each part of the new era of the liquidity system:

• Why is a system called “ample” so... scarce?

• Why stop QT at $6.6 trillion is technical threshold, not policy threshold?

• Why is US fiscal policy 2025 pushing the Fed from “interest rate operator” to “artificial lung of the system repo”?

• And most importantly: the future of Fed balance sheet will no longer be cyclical expansion-deflation, but slow, purposeful expansion to sustain a debt market that can no longer stand on its own.

This article is not just about the Fed. It is about the new era of US liquidity – an era where the balance sheet is no longer a stimulus tool, but infrastructure to prevent the system from strangling itself.