Quantitative Tightening (QT)

Quantitative tightening (QT) is a monetary policy tool used by the Federal Reserve to shrink its balance sheet and help control inflation. The main objective is to decrease the amount of money circulating in the economy.

This is usually done in two ways:

1. Letting government bonds mature without reinvesting: As bonds owned by the Fed reach maturity, the central bank simply does not buy new ones, reducing its holdings.
2. Selling government bonds: The Fed can also directly sell Treasury securities into the market, which pulls money out of the financial system as buyers use cash to purchase these bonds.

Both actions effectively lower the monetary base and can push interest rates upward, since less money is available for lending and investment.

It’s important not to confuse quantitative tightening with tapering. Tapering is when the Fed slows down the pace at which it buys new assets during quantitative easing (QE), so its balance sheet is still growing, just more slowly. Quantitative tightening, on the other hand, is an active reduction in the central bank’s asset holdings.