Quantitative tightening (QT) is a contractionary
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
tool applied by central banks to decrease the amount of liquidity or
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
in the economy. A central bank implements quantitative tightening by reducing the financial assets it holds on its balance sheet by selling them into the financial markets, which decreases asset prices and raises interest rates. QT is the reverse of
quantitative easing
Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
(or QE), where the central bank prints money and uses it to buy assets in order to raise asset prices and stimulate the economy. QT is rarely used by central banks, and has only been employed after prolonged periods of
Greenspan put
The Greenspan put was a monetary policy response to financial crises that Alan Greenspan, former chair of the Federal Reserve, exercised beginning with the crash of 1987. Successful in addressing various crises, it became controversial as it l ...
-type stimulus, where the creation of too much central banking liquidity has led to a risk of uncontrolled inflation (e.g. 2008, 2018 and 2022).
Background
Quantitative easing was massively applied by leading
central banks to counter the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
that started in 2008.
The prime rates were decreased to zero; some rates later went into the
negative territory. For example, to fight with ultra-low
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
or
deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
caused by the economic crisis, the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centr ...
, overseeing monetary policy for countries that use the euro, introduced negative rates in 2014. The central banks of Japan, Denmark, Sweden, and Switzerland also set negative rates.
The main goal of QT is to normalize (i.e. raise) interest rates in order to avoid increasing inflation, by increasing the cost of accessing money and reducing demand for goods and services in the economy. Like QE before it, QT has never been done before on a massive scale, and its consequences have yet to materialize and be studied. In 2018, the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
began retiring some of the debt on its balance sheet, beginning quantitative tightening. In 2019, less than a year after initiating QT, central banks, including the Federal Reserve, ended quantitative tightening due to negative market conditions occurring soon after.
In December 2021
Jerome Powell
Jerome Hayden "Jay" Powell (born February 4, 1953) is an American attorney and investment banker who has served as the 16th chair of the Federal Reserve since 2018.
After earning a degree in politics from Princeton University in 1975 and a ...
, chair of the
Federal reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, was reported as being under pressure to slow down
quantitative easing
Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
(QE) and
mortgage-backed security
A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment b ...
(MBS) purchases due to severe inflation with the CPI reading in November 2021 reaching a record-breaking 6.8% according to the
Bureau of Labor Statistics, the highest level in 40 years.
''
Bloomberg News
Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg Tele ...
'' called Powell "Wall Street's Head of State", as a reflection of how dominant Powell's actions were on asset prices and how profitable his actions were for Wall Street.
Effect on asset prices
Whereas QE caused the substantial rise in asset prices over the past decade, QT may cause broadly offsetting effects in the opposite direction. To mitigate the
financial market impact of the COVID-19 pandemic
Economic turmoil associated with the COVID-19 pandemic has had wide-ranging and severe impacts upon financial markets, including stock, bond, and commodity (including crude oil and gold) markets. Major events included a described Russia–Saudi ...
, Powell accepted asset price inflation as a consequence of Fed policy actions.
Powell was criticized for using high levels of direct and indirect quantitative easing as valuations hit levels last seen at the peaks of previous bubbles.
See also
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Consumer price index
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Excess reserves
Excess reserves are bank reserves held by a bank in excess of a reserve requirement for it set by a central bank.
In the United States, bank reserves for a commercial bank are represented by its cash holdings and any credit balance in an account ...
*
Greenspan put
The Greenspan put was a monetary policy response to financial crises that Alan Greenspan, former chair of the Federal Reserve, exercised beginning with the crash of 1987. Successful in addressing various crises, it became controversial as it l ...
*
Inflation hedge An inflation hedge is an investment intended to protect the investor against (hedge) a decrease in the purchasing power of money (inflation). There is no investment known to be a successful hedge in all inflationary environments, just as there is n ...
*
Inverted yield curve
In finance, an inverted yield curve happens when a yield curve graph of typically government bonds inverts in the opposite direction and the shorter term US Treasury bonds are offering a higher yield than the long-term Treasury bonds. Long ...
*
Negative interest on excess reserves
Negative interest on excess reserves is an instrument of unconventional monetary policy applied by central banks to encourage lending by making it costly for commercial banks to hold their excess reserves at central banks so they will lend more re ...
*
Zero interest-rate policy
Zero interest-rate policy (ZIRP) is a macroeconomic concept describing conditions with a very low nominal interest rate, such as those in contemporary Japan and in the United States from December 2008 through December 2015. ZIRP is considere ...
(ZIRP)
References
{{Reflist
External links
BNP Paribas on Quantitative tighteningFederal Reserve, USA Operations of central banks
Financial markets
Monetary policy