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Explainer: What Is Quantitative Tightening?

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Explainer: What Is Quantitative Tightening?
Explainer: What Is Quantitative Tightening?
Kundan Kishore - 29 October 2022
Central banks across the globe, including in the US, the UK and many European countries, have been hiking interest rates after every policy meeting to battle high inflation. The US Federal Reserve has been aggressive and has raised rates by more than 2 percentage points in just six months, while maintaining a hawkish stance and hinting at more rate hikes in the future. In December 2021, Fed chairperson Jerome Powell admitted that inflation wasn’t transitory and hinted that the era of loose money was ending. Three months later in March 2022, it started hiking the rates. Some economists are calling the era of rate hikes or monetary policy normalisation quantitative tightening (QT). Let’s understand what it is and how it works. What Is It? Central banks across the globe use various monetary actions and tools to control liquidity in the market. One of the tools that central banks use to control the supply of money in the economy is called QT. Through this tool, they reduce the balance sheet size by selling government bonds bought during quantitative easing (QE). QT leads...
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