What is quantitative tightening and should we be afraid of it?

Quantitative tightening (QT) is a very exciting term from the financial world that basically boils down to shrinking the balance sheet of the central bank and can be translated into Dutch as quantitative tightening. Usually when talking about QT it refers to the US Federal Reserve shrinking its balance sheet by selling securities (particularly government bonds) it has purchased in the past as part of the opposite process; quantitative easing (QE).

The goal of quantitative tightening is to decrease the liquidity (money supply) in the system and thereby cool the economy and reduce inflation.

A piece of history

During the 2008 financial crisis, the Federal Reserve first implemented QE in response to deteriorating economic conditions. To stimulate the economy, it bought large amounts of government bonds and mortgage-backed securities.

The purpose of this was to increase liquidity, which is fancy words for: making sure the market didn’t collapse completely. In addition, the Federal Reserve cut interest rates during that period to lower the cost of borrowing money.

All measures to stimulate the economy. In the years following the crisis, the Federal Reserve’s balance sheet has been significantly inflated by these purchases. To reduce the size of the balance sheet, the Federal Reserve decided to change the policy normalize and in 2017 the process of quantitative tightening was started.

From that period onwards, we see the balance sheet of the Federal Reserve falling gently. The US central bank does this by selling securities or by not reinvesting the proceeds of previous investments.

However, in 2019, this process was halted when the Federal Reserve changed its policy knocked over and started to stimulate again. This is also reflected in the chart, with COVID-19 of course being the ultimate bomb for the Federal Reserve’s balance sheet.

New period of QT

We are now in a period of QT again; in particular to bring inflation under control. Up to and including the banking crisis that started in March 2023, the Federal Reserve has managed to shrink its balance sheet reasonably well. After that, however, it grew again because they had to provide certain banks with liquidity (money).

That’s why you see that little jump up again at the end of the chart. For the coming period, however, the goal remains to shrink the balance sheet so that liquidity and, hopefully, inflation decreases.

This has not proven to be a good development for Bitcoin so far. Bitcoin mainly benefits from looser policy by the central bank, so that the value of fiat money falls and the scarcity of Bitcoin is more attractive.

The more US dollars that come into circulation, the more attractive Bitcoin’s absolute scarcity of 21 million units is. In that regard, all Bitcoiners are again waiting for the next period of quantitative easing.

Related News

Leave A Reply

Please enter your comment!
Please enter your name here