The Federal Reserve will discuss later this month whether to adjust its quantitative tightening programme that is unwinding the huge asset purchase operations it carried out to support the US economy and markets.
At least this will be a more informed discussion than when the central bank launched this QT programme in early 2022 and Fed chair Jay Powell warned: “I would just stress how uncertain the effect is of shrinking the balance sheet . . . ”
We finally have some international evidence on how QT works. Since the pandemic, seven central banks have made meaningful progress shrinking their balance sheets, in addition to the Fed’s QT from 2017-2019. A new study by myself with Wenxin Du and Matthew Luzzetti uses these experiences to assess the impact of announcing and implementing QT — as well as the advantages and disadvantages of different strategies.