Quantitative Tightening (QT)

Quantitative tightening is the reverse of quantitative easing. Instead of buying bonds and growing the balance sheet, the central bank lets bonds mature and doesn't reinvest the proceeds. This shrinks the money supply and effectively removes liquidity from the financial system. QT is generally bullish for the currency and bearish for risk assets. QT is slow. The Fed started its post-COVID QT in mid-2022 at a pace of about $95 billion per month — but the Fed's balance sheet was over $9 trillion at peak, so even at that pace it would take years to fully unwind. QT is a multi-year process. The market impact of QT is subtle compared to QE because it works gradually. Markets only notice QT when something breaks (like the September 2019 repo crisis or the 2023 regional bank crisis). Most of the time, QT is a slow background headwind for risk assets.