Quantitative Tightening [QT]

Quantitative Tightening (QT) is the reverse of quantitative easing, where central banks reduce their balance sheets by not reinvesting proceeds from maturing bonds or actively selling securities. The Federal Reserve began QT in 2017, allowing up to $50 billion monthly in Treasury and mortgage securities to roll off. After pausing during COVID, the Fed resumed QT in 2022, initially at $95 billion monthly. QT aims to normalize monetary policy and reduce excess liquidity without dramatically raising short-term rates. For example, as the Fed’s balance sheet shrinks from $9 trillion toward pre-crisis levels, it removes money from the financial system. QT’s effects include upward pressure on long-term yields, reduced bank reserves, and potential volatility in funding markets. The September 2019 repo market stress partly resulted from QT reducing reserves too much. Central banks must carefully calibrate QT pace to avoid market disruption. Unlike rate hikes which directly impact borrowing costs, QT works through quantities, affecting market liquidity and term premiums.