Quantitative Tightening
The Fed's policy of shrinking its balance sheet by allowing bonds to mature without reinvesting the proceeds — the reverse of QE.
Quantitative Tightening (QT) reduces the Fed's balance sheet by letting maturing Treasuries and MBS "roll off" without reinvestment (passive QT) or, more aggressively, by outright selling securities (active QT).
QT removes reserves from the banking system, tightening liquidity conditions. As the Fed's demand for Treasuries falls, private buyers must absorb more supply — generally pushing long-term yields higher and adding to term premium.
QT is harder to calibrate than QE. It operated in the background during 2018–2019 and was restarted in 2022 at the fastest pace in history. The risk is that QT drains reserves below the level banks need to function smoothly, triggering funding stress in repo markets — as happened briefly in September 2019.
Related Terms
FOMC
The Federal Open Market Committee — the Fed body that sets U.S. monetary policy, meeting eight times per year to vote on the federal funds rate target.
IntermediateHawkish
A monetary policy stance favouring higher interest rates and tighter financial conditions to combat inflation — the opposite of dovish.
IntermediateQuantitative Easing
A Fed policy of purchasing Treasury bonds and MBS to inject liquidity, lower long-term yields, and stimulate the economy when short rates are near zero.
IntermediateRepo
A repurchase agreement — a short-term (often overnight) collateralized loan where securities are sold and agreed to be repurchased, serving as the plumbing of money markets.
AdvancedReverse Repo
The Fed's tool for absorbing excess reserves from money markets — the counterparty sells Treasuries to the Fed overnight, draining liquidity from the system.
AdvancedSOFR
Secured Overnight Financing Rate — the benchmark short-term interest rate based on actual overnight Treasury repo transactions, replacing LIBOR.
AdvancedTerm Premium
The extra yield investors demand to hold longer-term bonds instead of rolling short-term bills — compensation for duration, inflation uncertainty, and supply risk.
Advanced