Quantitative tightening (QT) is a contractionary monetary policy applied by a central bank to decrease the amount of liquidity within the economy. The policy is the reverse of quantitative easing (QE) aimed to increase money supply in order to "stimulate" the economy. The QE policy was massively applied by leading central banks to counter the Great Recession that started in 2008. The prime rates were decreased to zero; some rates later went into the negative territory. For example, to fight with ultra-low inflation or deflation caused by the economic crisis, the European Central Bank, overseeing monetary policy for countries that use the euro, introduced negative rates in 2014. The central banks of Japan, Denmark, Sweden, and Switzerland also set negative rates.
The main goal of QT is to normalise (i.e. raise) interest rates in order to avoid increasing inflation as it becomes expensive to access money and reduces demand for goods and services in the economy. Like QE before it, QT has never been done before on a massive scale, and its consequences have yet to materialize and be studied. Beginning in 2018 the Fed began retiring some of the debt on their balance sheet beginning Quantitative Tightening.
An effect on asset prices
Whereas QE caused the substantial rise in asset prices over the past decade, QT may cause broadly offsetting effects in the opposite direction.
- Excess reserves
- Inflation hedge
- Negative interest on excess reserves
- Zero interest-rate policy (ZIRP)
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