Quantitative tightening (QT)

During quantitative easing, central banks buy government bonds and other securities to lower long-term rates and add liquidity. Quantitative tightening reverses this. The Federal Reserve has conducted QT mainly through runoff, letting Treasuries and mortgage-backed securities mature without full reinvestment, subject to monthly caps. Outright sales are possible but less common.

QT drains reserves from the banking system and increases the supply of bonds the private sector must absorb, which can push up term premiums and tighten financial conditions. Central banks typically slow or end QT when reserves approach levels considered ample, to avoid stress in money markets such as repo. Changes to QT pace are announced by the FOMC and closely watched for liquidity effects.

For allocators, QT affects market liquidity, Treasury yields and risk appetite, including for cryptoassets that are sensitive to dollar liquidity. Example: when the Fed lowers its monthly runoff cap, investors may read it as a modest easing of liquidity conditions even without a rate cut.