Quantitative Tightening

Quantitative Tightening (QT) refers to monetary policies employed by the Federal Reserve System (The Fed) to reduce the size of their balance sheet and contain inflationary pressure. The goal of QT is to reduce the money supply within financial markets.

The Fed achieves QT primarily through two methods:

1. Allowing bonds to mature without reinvestment: The Fed can choose not to reinvest the proceeds of bonds that have matured, effectively reducing the balance sheet.
2. The outright sale of government bonds in the secondary Treasury market: The Fed increases the supply of bonds available in the market, reducing the amount of money in circulation, and helping control inflation.

Both methods may result in a smaller monetary base and higher interest rates as there is less money available for borrowing and investment.

Quantitative tightening should not be confused with tapering. Tapering is the process of reducing the pace of quantitative easing, where the balance sheet is still expanding, albeit at a slower rate. Quantitative tightening refers to an outright reduction in the size of the Fed’s balance sheet.