Quantitative Tightening
Futures First
Futures First is a private limited company that provides services in global derivatives markets.
What is it and how does it work?
Quantitative tightening (QT) is a contractionary monetary policy tool used by central banks to decrease the amount of liquidity or money supply in the economy. A central bank implements QT by reducing the financial assets (govt bonds, MBSs, Corporate Bonds etc) it holds on its balance sheet by rolling them off/selling them into the financial markets, which decreases asset prices and raises interest rates. QT is the reverse of quantitative easing (or QE), where the central bank prints money and uses it to buy assets in order to raise asset prices and stimulate the economy.
QT is generally done alongside raising benchmark interest rate to cool the overheating economy so that inflation can fall back to target. Active QT, selling bonds in the secondary market, is stronger contractionary tool as compared to passive QT where central bank rolls off assets as they mature. QT is comparable to raising rates.?