What are Quantitative Easing and Quantitave Tighterning
Updated: Dec 22, 2022
What is Quantitative Easing?
Quantitative Easing (QE) refers to monetary policies that expand the Federal Reserve System (Fed) balance sheet.
The Fed does this by going into the open market and buying longer-term government bonds as well as other types of assets, such as mortgage-backed securities (MBS).
This adds money to the economy, which serves to lower interest rates.
What is Quantitative Tightening?
Quantitative tightening, on the other hand, does the exact opposite to Quantitative Easing (QE). It shrinks the Fed's balance sheet by either selling Treasuries (government bonds) or letting them mature and removing them from its cash balances.
This removes money from the economy and leads to higher interest rates. Is Tapering the same thing as Quantitative Tightening? No. Tapering is the process of reducing the pace of quantitative easing (QE), but the balance sheet is still being expanded, though at a slower rate. Quantitative tightening (QT) reduces the balance sheet. Simply put, tapering occurs between QE and QT.