QT’s Influence Appears Minimal for Now, According to Research
According to recent research analyzing the impact of major central banks’ move to reduce their asset holdings, initiated in 2022 as part of the fight against inflation, the results suggest only a modest impact on interest rates and minimal influence on various financial indicators. The study focused on the direct effects of “quantitative tightening” (QT) efforts on government bond yields in seven markets, including the U.S. and the euro area.
The estimated overall impact of QT on government bond yields for securities maturing a year or more in the future ranged from 4 to 8 basis points across the studied markets. Notably, in the U.S., the effect was described as “close to zero” due to the Federal Reserve’s gradual and transparent approach, characterized as a “drip feed” of information, allowing markets to adjust over time. This strategy contrasted with the hope expressed by former Fed Chair Janet Yellen in 2017, during a previous round of quantitative tightening, that the process would be “dull and uneventful, like watching paint dry.”
Since the onset of the pandemic, central banks, including the Fed, the European Central Bank, and the Bank of England, have collectively reduced their balance sheets by around $2.2 trillion through direct sales or passive “roll-off.” The study highlighted that if QT has an impact, it is primarily attributed to central bank announcements of their plans rather than the actual transactions.
The research findings were presented at a monetary policy forum sponsored by the Clark Center for Global Markets at the University of Chicago Booth School of Business. The study’s authors, including Wenxin Du from Columbia Business School, Kristin Forbes from MIT-Sloan School of Management, and Matthew Luzzetti from Deutsche Bank, concluded that the results should instill more confidence in central banks to unwind asset purchases in the future. This analysis provides valuable insights into the effectiveness and implications of central banks’ efforts to normalize monetary policy after unprecedented measures taken during the pandemic.
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