Quantitative tightening

Quantitative tightening (QT) is a contractionary monetary policy tool applied by central banks to decrease the amount of liquidity or money supply in the economy. A central bank implements quantitative tightening by reducing the financial assets it holds on its balance sheet by selling them into the financial markets, which decreases asset prices and raises interest rates. QT is the reverse of quantitative easing (or QE), where the central bank prints money and uses it to buy assets in order to raise asset prices and stimulate the economy. QT is rarely used by central banks, and has only been employed after prolonged periods of Greenspan put-type stimulus, where the creation of too much central banking liquidity has led to a risk of uncontrolled inflation (e.g. 2008, 2018 and 2022). Quantitative easing was massively applied by leading central banks to counter the Great Recession that started in 2008. The prime rates were decreased to zero; some rates later went into the negative territory. For example, to fight with ultra-low inflation or deflation caused by the economic crisis, the European Central Bank, overseeing monetary policy for countries that use the euro, introduced negative rates in 2014. The central banks of Japan, Denmark, Sweden, and Switzerland also set negative rates. The main goal of QT is to normalize (i.e. raise) interest rates in order to avoid increasing inflation, by increasing the cost of accessing money and reducing demand for goods and services in the economy. Like QE before it, QT has never been done before on a massive scale, and its consequences have yet to materialize and be studied.