- Quantitative Tightening, as envisaged by the Fed, implies an equivalent, and ultimately sizeable, reduction of bank reserves on the liability side of the Fed’s balance sheet.
- However, changes in monetary aggregates have little impact on the real economy or inflation. As a result, the money multiplier is simply likely to rise, as will the velocity of money.
- The most important effect of QT will be through long-term rates. Maturing UST’s will be replaced by new issues to the market. Once they reach their target pace, roll-offs will be equivalent to a full 60% of current net issuance.
- The effect will be moderate at first, but could be amplified by the knock-on effects on other asset prices, simultaneous policy changes by other central banks or a widening US federal deficit.
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