Quantitative Tightening and the BTC bottom

Quantitative Tightening and the BTC bottom

Through quantitative tightening, the Federal Reserve reduces its supply of monetary reserves in order to tighten its balance sheet—and it does so simply by letting the bonds and other securities it has purchased reach maturity.

QT's main impact is in the financial markets: It's seen as likely to drive up real or inflation-adjusted yields, which in turn makes stocks somewhat less attractive. And it should put upward pressure on Treasury term premia, or the compensation investors need for bearing interest-rate risks over the life of a bond.

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.

Quantitative easing, or qe, once an unconventional tool of monetary policy, has become commonplace over the past decade. During the pandemic alone the Federal Reserve bought a staggering $3.3trn in Treasuries and $1.3trn in mortgage-backed securities as it sought to keep borrowing costs low. The reverse process, quantitative tightening (qt), when central banks shrink their balance-sheets, has been far rarer. The Fed is the only central bank to have truly attempted it, and it had to stop abruptly in 2019 because of market ructions. So its plan for reducing its assets—trailed in the minutes of its meeting in March, published on April 6th—takes it into relatively uncharted territory.

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