Goodbye, QE. Hello, QT
QUANTITATIVE EASING, or QE, once an unconventional tool of monetary policy, has become commonplace over the past decade. During the pandemic alone the Federal Reserve bought a staggering $3.3trn in Treasuries and $1.3trn in mortgage-backed securities as it sought to keep borrowing costs low. The reverse process, quantitative tightening , when central banks shrink their balance-sheets, has been far rarer.
As Lael Brainard, a member of the Fed’s board, noted on April 5th, this round of QT will be more aggressive than the Fed’s previous iteration. With inflation racing ahead and the labour market tight, the central bank wants to cool the economy quickly. Coupled with interest-rate rises, QT is likely to be a drag on growth.
Multiple rounds of bond-buying by central banks since the financial crisis of 2007-09 have yielded some understanding of how QE works. It signals a commitment to ultra-low interest rates. It suppresses long-term rates. And it supports liquidity, ensuring that markets operate smoothly. The second channel—QT’s direct impact on yields—involves heroic guesstimates. Some analysts think the Fed will shrink its balance-sheet by $3trn over the next three years . Mark Cabana of Bank of America reckons this could equate to anywhere between a quarter point and 1.25 percentage points of rate increases—a remarkably wide range. Mr Powell has also noted the uncertainty about QT: “We have a much better sense, frankly, of how rate increases affect financial conditions.
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