Quantitative Tightening
A central bank policy of reducing its balance sheet by selling bonds or letting them mature without reinvestment.
What is Quantitative Tightening?
Quantitative tightening (QT) is the reverse of quantitative easing: the central bank reduces the size of its balance sheet by either selling the bonds it holds outright or, more commonly, by allowing bonds to mature without reinvesting the proceeds. As bond holdings decline, reserves in the banking system fall, reducing the money supply and putting upward pressure on long-term interest rates. QT is a form of monetary tightening used when the economy is overheating and the central bank wants to reduce excess liquidity. Because QT is a relatively new and untested tool at scale, central banks use it cautiously and with less predictability than conventional rate moves.
Example
The Federal Reserve began QT in June 2022, allowing up to $95 billion per month in Treasuries and mortgage-backed securities to mature without reinvestment, seeking to shrink its $9 trillion balance sheet. By mid-2024, the balance sheet had declined to approximately $7.4 trillion. The pace of QT was later slowed in 2024 to reduce market disruption.