Quantitative tightening (QT)

In plain terms

In hard times, central banks buy government bonds in bulk to inject money. That is quantitative easing. QT works in reverse: the central bank lets bonds mature without reinvesting, or sells them, so its balance sheet shrinks. Pulling money out has an effect similar to raising rates.

The Fed began quantitative tightening in 2022.

Why it matters

The policy rate mainly moves short-term rates, while QT works on long-term yields and the overall amount of money in the system. Many investors see shrinking liquidity as a headwind for stocks and crypto, so the pace and end date of QT are watched almost as closely as rate decisions.

How it connects to markets

• Faster or longer QT: long-term yields tend to rise and liquidity tightens, a headwind for risk assets
• Slowing or ending QT: steadier long-term yields and better liquidity, usually supportive for risk assets
• When short-term funding markets show strain, such as sudden spikes in overnight rates, central banks have adjusted the pace

Where to check

• Federal Reserve balance sheet trends