Definition
QT is the reverse of QE—the central bank shrinks its balance sheet by letting maturing bonds roll off (passive QT) or actively selling securities (active QT). This reduces liquidity in the financial system, puts upward pressure on long-term interest rates, and tightens financial conditions. QT typically occurs alongside rate hikes as part of overall monetary tightening.
lightbulb Example
The Fed allows $60B in Treasuries and $35B in MBS to mature monthly without reinvestment. Over a year, this reduces the balance sheet by $1.14 trillion, withdrawing liquidity that had been supporting asset prices.
verified_user Key Points
- Reverse of quantitative easing
- Reduces liquidity in financial system
- Puts upward pressure on long-term rates
- Passive (roll-off) or active (selling) approaches