Skip to content
Subscriber Only

After Years of Easing, Meet Quantitative Tightening: QuickTake

Ratcheting down the money supply.

Ratcheting down the money supply.

Photographer: Peter Dazeley/Getty Images
Updated on

For a decade, investors around the world have ridden a rising tide of more than $12 trillion -- the extra cash pumped into the global system by key central banks to counter the deepest financial crisis since the Great Depression, and its aftermath. Now that flow of so-called quantitative easing is turning to the ebb of quantitative tightening, and markets are -- perhaps not coincidentally -- showing increasing volatility.

The easy answer is that it’s the opposite of quantitative easing, or QE. Milton Friedman had proposed a type of QE decades ago, and the Bank of Japan pioneered its use in 2001 after it had run out of conventional ammunition by lowering its benchmark short-term interest rate to zero. In QE, a central bank buys bonds to drive down longer term rates as well. As it creates money for those purchases, it increases the supply of bank reserves in the financial system, and the hope is that lenders go on to pass that liquidity along as credit to companies and households -- spurring growth. To avoid the impression that the central bank is just financing the government, it buys the bonds in the secondary market rather than directly from the Treasury or finance ministry.