Quantitative tightening (QT)
MacroDefinition
The reverse of QE. Central bank shrinks its balance sheet, either by passively letting bonds mature without reinvesting, or actively selling. Drains bank reserves, which raises long-term yields and tightens financial conditions.
QT moves slower than QE and is harder to calibrate. The Fed began QT in mid-2022 at a $95B/month cap; effects on liquidity show up with a 6-12 month lag.
QT moves slower than QE and is harder to calibrate. The Fed began QT in mid-2022 at a $95B/month cap; effects on liquidity show up with a 6-12 month lag.
Example
During 2022-2024 QT the Fed shrunk its balance sheet from $9T to ~$7T. The 10Y Treasury yield rose from 1.5% (early 2022) to nearly 5% (late 2023) — a combination of QT and Fed rate hikes.