Quantitative tightening
The reverse of QE — shrinking the central bank's balance sheet, usually by letting bonds mature without reinvesting, which destroys reserves.
Also called: balance sheet runoff, balance sheet normalisation.
Runoff is passive. When a bond the central bank holds matures, the issuer repays and the central bank simply does not buy a replacement. The asset disappears from one side of the sheet and reserves disappear from the other.
That makes QT slower and less controllable than QE. The pace is set by the maturity profile of what is held and by any monthly cap, not by a decision taken meeting to meeting.
The binding question is where reserve scarcity begins. Nobody knows the level in advance, and overshooting it shows up first as strain in repo markets — as the US discovered in September 2019.
The mechanics
- Central bank
- Assets: bonds down at maturity. Liabilities: reserves down by the same amount.
- Interacts with
- The Treasury account and ON RRP balances, which move reserves independently.
- Warning sign
- Repo rates printing persistently above the administered floor.
The common misreading
That QT is simply QE run backwards at the same speed and with the same effect. Purchases are chosen; runoff is inherited from a maturity schedule, and its impact lands unevenly across markets.
Related terms
- Quantitative easingLarge-scale central bank purchases of bonds, paid for with newly created reserves, used to ease financial conditions once the policy rate is already near its floor.
- Bank reservesDeposits that commercial banks hold at the central bank — the settlement asset banks use to pay each other, and a liability of the central bank rather than an asset it owns.
- Repurchase agreementThe sale of a security combined with an agreement to buy it back at a set price and date — legally a sale, economically a loan secured by collateral.
- Secured Overnight Financing RateA broad measure of the cost of borrowing cash overnight secured by US Treasury collateral, published each morning by the New York Fed and the main US replacement for LIBOR.
Primary sources
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