Quantitative Tightening
Quick Definition
The process by which a central bank reduces its balance sheet by allowing bonds to mature without reinvestment or actively selling assets.
Key Takeaways
- The reverse of QE — shrinks the central bank's balance sheet
- Withdraws liquidity by letting bonds mature without reinvestment
- Puts upward pressure on long-term interest rates
- Can cause market stress if conducted too aggressively
What Is Quantitative Tightening?
Quantitative tightening (QT) is the reverse of quantitative easing — a process where the central bank shrinks its balance sheet by allowing maturing bonds to roll off without reinvestment or by actively selling securities back to the market. QT withdraws liquidity from the financial system, tightening financial conditions and putting upward pressure on long-term interest rates. The Fed began its first major QT program in 2017-2019, reducing its $4.5 trillion balance sheet by about $700 billion before halting due to market stress. A second QT round began in June 2022, with the Fed allowing up to $95 billion per month in Treasuries and mortgage-backed securities to roll off. QT operates as a complement to rate hikes in tightening monetary policy.
Quantitative Tightening Example
- 1The Fed's QT program starting in 2022 aimed to reduce its $9 trillion balance sheet by up to $95 billion monthly.
- 2During 2019 QT, the repo market seized up in September, forcing the Fed to pause balance sheet reduction.
- 3QT puts upward pressure on bond yields because the market must absorb more Treasury supply without Fed purchases.
Related Terms
Quantitative Easing (QE)
An unconventional monetary policy where a central bank purchases government bonds and other securities to increase money supply and lower long-term interest rates.
Monetary Policy
Actions by a central bank to manage the money supply and interest rates to achieve macroeconomic objectives like stable prices and full employment.
Central Bank
A national institution responsible for managing a country's monetary policy, regulating banks, maintaining financial stability, and issuing currency.
Federal Funds Rate
The interest rate at which banks lend reserve balances to each other overnight, set as a target range by the Federal Reserve.
Monetary Base
The total amount of currency in circulation plus reserves held by commercial banks at the central bank — the foundation of the money supply.
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
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