MacroIntermediate#Fed#Monetary Policy
Quantitative Tightening (QT)
Q
Definition
The reverse of QE, where central banks reduce their balance sheets by selling assets, effectively withdrawing liquidity from the market.
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Concept Diagram
Key Takeaways
1
QT is the reverse of QE: the Fed shrinks its balance sheet by letting bonds mature or selling them, draining liquidity.
2
As dollars become scarce, the cost of capital rises, putting massive selling pressure on risk assets like Bitcoin.
3
QT is the ultimate bearish macro signal — only fundamentally sound projects tend to survive QT periods.
4
Volatility typically increases during QT as the market adjusts to a higher cost of capital and reduced leverage.
Practical Example
In June 2022, the Fed begins QT, allowing up to $95B in bonds to roll off monthly. BTC drops from $30,000 to $15,500 over the next six months as liquidity drains from the system. Risk assets across the board enter a deep bear market.
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Related Terms
Macro
Quantitative Easing (QE)A monetary policy where a central bank purchases government securities to increase money supply and encourage lending/investment.
Macro
Yield Curve InversionA situation where short-term interest rates are higher than long-term ones, historically a reliable precursor to a recession.
Macro
Soft LandingA cyclical slowdown that avoids recession, where a central bank successfully raises rates to cool inflation without crashing the economy.
Macro
M2 Money SupplyA measure of the money supply that includes cash, checking deposits, and easily convertible 'near money' like savings and money market funds.
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