An Overview of Quantitative Tightening

A recent Bloomberg article offers insights on the current trend of quantitative tightening and the subsequent uptick in market volatility:

  • In a period of quantitative easing, the article explains, a central bank buys bonds to drive down longer-term rates while creating liquidity in the system and spur growth. The U.S. Federal Reserve applied quantitative easing “in force starting in 2008, buying up bonds to revive the flow of credit to a shrinking economy. It stopped increasing its stockpile of bonds in 2014, and now is shrinking its balance sheet” in the spirit of quantitative tightening.
  • The article reports, “The Fed is now letting up to $40 billion of its bond holdings mature every month without replacing them, a cap it will raise to $50 billion later this year.” According to the Fed, the article explains, the winding down of the balance sheet is part of a normalization of its policy stance, “along with rate hikes, given the solid performance of the American economy and rising inflationary pressures.”
  • Even though the Fed’s tightening has been gradual, it has still “roiled the markets,” the article reports. According to Bank of America Merrill Lynch analysts, quantitative tightening has been the “primary driver of asset-class performance this year. They add that “declines have hit markets from emerging-nation stocks to corporate bonds, responding to a climb in yields on benchmark government debt.”
  • Some believe that tightening is a bad idea, the article says. “The damage to emerging markets has sparked calls for the Fed to be mindful of the ramifications of its normalization campaign.”