Has the era of permanent QE already arrived? Here's what it means for your investment portfolio

Last week, Jerome Powell dropped a bombshell: “The Federal Reserve could halt its balance sheet reduction in the coming months”. Behind these seemingly technical words lies a message that markets have already deciphered: quantitative contraction (QT) is dying, and quantitative expansion (QE) is inevitable. The question is not if it will happen, but when and with what intensity.

But before understanding the future, you need to see the reality of the present: the US financial system is on the brink of a structural liquidity crisis, more dangerous than the one that nearly collapsed the market in September 2019.

The panic test is already in the numbers

The SOFR (secured overnight financing rate) is the pulse of the financial system. Currently, it is trading 19 basis points above the effective federal funds rate (EFFR). When you see this, you are witnessing silent panic in action.

To understand why this is important: normally, borrowing guaranteed by Treasury bonds should be cheaper than unsecured borrowing. When reality reverses, it means banks have so little liquidity that they prefer to lend unsecured at lower rates rather than accept Treasury bonds as collateral. It’s as if a banker told you: “I trust less in your collateral than in your word.”

This spread is not a temporary spike. From 2024 to 2025, it has grown steadily, indicating that the reserve shortage is not cyclical but structural.

Why are bank reserves in a critical zone?

Total reserves in the system now hover around $2.96 trillion. Sounds like a large number, but divided by the current US GDP of $30.5 trillion, it represents only about 9.71% of GDP.

Powell has publicly made it clear: when that percentage drops below 10-11%, the Fed begins to show signs of real panic. Today, we are already below that, breathing the same stale air that preceded the 2019 crisis.

To make matters worse, the tool that served as an escape valve for years is now empty. The Reverse Repo Facility (RRP) reached a maximum of $2.4 trillion in 2022. Today, it has just a few billion dollars left. Over 99% has disappeared, removing the liquidity cushion that the financial system had come to consider guaranteed.

In January of this year, total liquidity (reserves + RRP) reached $4 trillion. Today, it’s less than $3 trillion. More than $1 trillion vanished in less than a year, while the Fed continues draining $25 billion monthly through QT.

2019 was mild compared to this

Many ask: “In 2019, we experienced a similar crisis, why will this be worse?”

Three fundamental reasons:

First, in 2019, reserves fell to 7% of GDP when the economy was smaller. Today, at 9.71%, we already see signs of tension. The financial system has grown, debt is more leveraged, and regulatory requirements are stricter. The cushion needed is larger.

Second, we don’t have the RRP buffer this time. In 2019, it was almost nonexistent, but the system got used to that extra cushion. Its current absence forces a brutal readjustment.

Third, banks are wounded from the 2023 crisis. When Silicon Valley Bank and First Republic collapsed just three years ago, they left deep scars. Regulators now demand stricter liquidity ratios. Banks are defending themselves by hoarding reserves, reducing loans, and raising rates. It’s pure stress behavior.

The Fed already knows what’s coming

On September 17, 2019, the overnight repo rate jumped from 2% to 10 almost instantly. Reserves were too low, and the system collapsed. The Fed had to panic and inject tens of billions in emergency operations.

Months later, without even waiting for the (pandemic), which would arrive six months later, the Fed restarted QE.

Today, the Fed knows exactly what will happen if it lets things deteriorate further. Powell is playing chess: talking about “pausing” calmly while preparing the ground for expansion, trying to avoid another panic like in 2019. They want it to look like a controlled decision, not an emergency rescue.

But the outcome will be the same: large-scale QE is guaranteed.

Math that doesn’t lie: the Fed has no options

GDP is growing at 2-3% annually. This means that, just to keep the reserves-to-GDP ratio stable, reserves should grow by $60-90 billion per year.

But the Fed is doing the opposite: reducing $300 billion annually through QT.

Even if the Fed stopped QT today, the ratio would continue to decline over time: from 9.7% to 9.5%, then to 9.2%, until something breaks.

The Fed has two options:

1. Make reserves grow with GDP (moderate but persistent QE)
2. Let the ratio collapse

There is no third option. The Fed is trapped in a wheel; it has no choice but to keep going.

They will probably announce the end of QT in December or January as a “technical adjustment,” not as a policy change. If things deteriorate faster, an emergency statement could come earlier.

When the Fed turns on the tap, it never does so gradually

This is where the word multiplier of monetary expansion works at maximum power: when the Fed shifts to QE, it doesn’t do so gradually. Look at history:

• 2008-2014: Three rounds of QE + Operation Twist. The balance sheet went from $900 billion to $4.5 trillion.
• 2019-2020: The Fed started buying $60 billion per month in October 2019. Then the pandemic arrived, and they expanded aggressively, adding $5 trillion in months.

When this cycle ends, don’t expect a gentle QE. Prepare for an expansion as fierce as a flood. The Fed could buy between $60 and $100 billion in Treasury bonds monthly “to maintain adequate reserves.”

The federal government needs 2+ trillion annually to spend

The federal deficit exceeds $2 trillion per year. With the RRP exhausted, where does the money come from to fund the government?

There isn’t enough private demand. If banks sell reserves to buy Treasury bonds, that further reduces reserves and worsens the problem. This forces the Fed to be the buyer of last resort.

The Fed has essentially pushed itself into permanent QE. It cannot reduce its balance sheet without damaging the system. It cannot maintain it without worsening inflation. It’s trapped.

What to do when the Fed prints uncontrollably?

There is only one rational answer: own assets that the Fed cannot print.

Gold has already moved. In January 2025, it was trading around $2,500 per ounce. Today, it exceeds $4,000. It has risen over 70%. Smart investors are not waiting for the announcement; they have already bought.

But the real multiplier is in Bitcoin.

Bitcoin is currently trading at $90,820, and there are fundamental reasons why it will surpass gold in the next QE cycle:

Bitcoin is absolute scarcity: 21 million fixed total supply. Neither the Fed, nor the government, nor anyone can create more. Gold, on the other hand, increases by 1.5-2% annually through mining. Its scarcity is relative.

Bitcoin follows the gold trend but with a multiplier: Historically, when gold rises steadily due to monetary concerns, Bitcoin tends to catch up and often surpass it in percentage terms.

Bitcoin completely removes you from the system: Gold protects against inflation. Bitcoin exists outside the system; it cannot be confiscated (if stored properly), and cannot be devalued or manipulated by central banks.

The next QE cycle will be different: It will be the most aggressive ever seen. The Fed will have to print more to sustain a slowly growing economy while financing a $2+ trillion deficit. Scarce digital assets like Bitcoin will benefit disproportionately.

The countdown has begun

Powell just gave the signal. Reserves are in a critical zone. SOFR is rising. RRP is dead. All signs point to an announcement ending QT in the coming weeks.

When the Fed flips the switch, there’s no turning back. What happened in 2019 was a rehearsal. The main act is coming.

Those who understand this before the official announcement will have already positioned their portfolios. Others will end up buying gold and Bitcoin after the announcement, when prices have risen another 30%.

The question is simple: where will you be when the era of permanent QE begins?