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When the Fed shrinks its balance sheet by letting bonds it owns mature without replacing them, pulling money out of the financial system. It's the reverse of quantitative easing (QE).
Why It Matters
QT is the Fed's "second lever" alongside interest rates. By draining liquidity, it tends to push up longer-term yields and remove a tailwind that asset prices enjoyed during QE. Beginners often watch only the rate decision and miss that the balance sheet is moving in the background too.
Key Points
- QT = balance sheet shrinks (money drained); QE = balance sheet grows (money added).
- Tends to lift longer-term yields and tighten financial conditions.
- Runs in the background, separate from the headline rate decision.
Related Terms
Common Questions
When the Fed shrinks its balance sheet by letting bonds it owns mature without replacing them, pulling money out of the financial system. It's the reverse of quantitative easing (QE). QT is the Fed's "second lever" alongside interest rates. By draining liquidity, it tends to push up longer-term yields and remove a tailwind that asset prices enjoyed during QE.
QT is the Fed's "second lever" alongside interest rates. By draining liquidity, it tends to push up longer-term yields and remove a tailwind that asset prices enjoyed during QE. Beginners often watch only the rate decision and miss that the balance sheet is moving in the background too.
QT = balance sheet shrinks (money drained); QE = balance sheet grows (money added).
Tends to lift longer-term yields and tighten financial conditions.
Runs in the background, separate from the headline rate decision.