The writer is an FT contributing editor and global chief economist at Kroll Quantitative easing has developed a certain resemblance to the Eagles’ “Hotel California” — you can check out any time you like, but you can never leave. We should pay more attention to quantitative tightening, suggest former Reserve Bank of India governor Raghuram Rajan and others in a recent paper. Commercial banks change their behaviour when there are plentiful reserves, making QT far more volatile and difficult to pull off than expected.
Our grasp of how QE and QT really work remains tenuous. In announcing a bond-buying programme, a central bank signals to the markets it is committed to accommodative policy and that rates will be low for a long time. The entire yield curve drops as a result. In purchasing long-dated bonds, the central bank pushes their yield down and in theory incentivises investors to move into higher return securities (the so-called portfolio rebalancing channel).
However, QT isn’t just QE in reverse. When rates are at the zero lower bound, the signalling channel is strong. But announcements about the central bank’s balance sheet are less effective when the policy rate is well above zero.