- Central banks are introducing quantitative tightening (QT) measures but appear to regard them as secondary measures that contribute little to active policy tightening.
- Our analysis suggests that QT measures may have a much bigger impact on yields, output, and inflation than central banks expect.
- This may result in central banks tightening more than necessary in order to bring inflation down, potentially exacerbating any recessionary dynamics.
Many central banks have begun introducing, or are at least discussing, quantitative tightening (QT) measures. Judging from their public communications, central banks intend these policies to run largely in the background and contribute little to active policy tightening. I believe their impact could be much greater than this, however—potentially sharpening bond market volatility and creating the risk that central banks tighten policy more than necessary.
QT is a more limited policy tool than quantitative easing (QE) in that it impacts economies in fewer ways. QE influences markets through six main channels: market stabilization, the reduction of uncertainty, policy signaling, exchange rates, portfolio rebalancing, and bank lending.