QE and QT (quantitative easing and tightening): definition

When the policy rate is no longer enough

When its rate is already close to zero, a central bank can hardly cut it further. It can, however, buy securities on a massive scale, mainly government bonds, to push long-term rates down. This is quantitative easing, or QE. It pays for these securities by creating bank reserves, which expands its balance sheet.

The Fed used it from late 2008, the ECB on a large scale from 2015 with its asset purchase programme, then again in 2020 with the pandemic emergency programme.

QT, the reverse operation

Quantitative tightening means shrinking the balance sheet, usually by not reinvesting maturing securities. The Fed started it in June 2022. QT withdraws liquidity from the system, pushes long-term rates up and can create strains in the money market when reserves become scarce.

The effect on currencies

All else being equal, QE weighs on the currency: it lowers yields and increases the amount of money. QT supports it. But as with rates, only the gap with expectations counts: announcing a slower pace of purchases than expected can lift the currency in the middle of QE.

Frequently asked questions

Is QE “printing money”?

Not strictly: the central bank creates bank reserves, not banknotes, and buys securities on the secondary market. The effect on the money supply in circulation then depends on the credit banks extend.

How can I follow the Fed's QT?

Through the size of its balance sheet, published every Thursday in the H.4.1 report, and through outstanding bank reserves and reverse repo.