In the aftermath of the financial crisis, policymakers around the world have responded in different ways to attempts to revive the economy. Quantitative tightening (QT) refers to a strategy where central banks raise interest rates in order to curb inflation while quantitative easing (QE) refers to a policy where central banks print money in an effort to stimulate the economy.
This article will explore the pros and cons of each approach.
Comparison between Quantitative Tightening (QT) and Quantitative Easing (QE)
|Quantitative Tightening (QT)||Quantitative Easing (QE)|
|✔️ QT is the process of selling government securities in order to shrink the money supply. This tightens monetary policy and can be used to cool down an overheating economy or fight inflation.||✔️ QE is the process of buying government securities (eg. bonds) in order to increase the money supply. This loosens monetary policy and can be used to stimulate a slowing economy or fight deflation.|
The Federal Reserve (FED) began doing QT in October 2017. The FED has been selling $10 billion worth of government securities each month. This is slowly shrinking the money supply and is meant to prevent the economy from overheating.
Quantitative Tightening: How it works and its Benefits
Quantitative tightening, or QT, is a policy the Federal Reserve can use to tighten monetary policy. It works by selling off assets from its balance sheet. This shrinks the size of the balance sheet and reduces the money supply. This makes it harder for banks to borrow money and lend to businesses and consumers.
QT has several benefits. It can help keep inflation in check, reduce the risk of financial instability, hyperinflation; and make it less likely that interest rates will need to be raised rapidly in the future.
> Read more in our Financial Glossary Term: ‘What Is Quantitative Tightening (QT). Pros and Cons’.
Quantitative Easing: How it works and its Benefits
Quantitative easing is the process of the Federal Reserve buying Treasury securities and mortgage-backed securities from banks in order to increase the money supply. The main benefit of quantitative easing is that it increases liquidity in the financial system and encourages lending.
QE benefits: this helps to stimulate economic growth by making it easier for businesses to borrow money and expand their operations. Quantitative easing also has the effect of pushing interest rates down, which makes it cheaper for consumers to borrow money and buy cars, homes, and other big-ticket items.
> Read more in our Investment Glossary Term: ‘What Is Quantitative Easing (QE). Pros and Cons’.
Which approach is better?
So which approach is better? There is no easy answer. QE may help boost growth in the short-term, but it can also lead to higher levels of debt and inflation. QT may be less risky in the long run, but it could cause a recession if done too quickly.
In conclusion, quantitative tightening is less risky than quantitative easing, but it could still lead to negative consequences. It is important to weigh the risks and benefits of each option before making a decision.