It’s Time for the Fed to Slay Its Quantitative-Tightening Demons
The stakes are high for central bankers to prove they know how to control and retire their unconventional policy tools.
Knowing when to stop.
Photographer: Win McNamee/Getty Images
The Federal Reserve’s asset purchase program, known as quantitative easing, has twice helped save the US economy — first during the financial crisis and then again with the Covid-19 pandemic. Its long-term viability depends on policymakers’ ability to shut it down when it’s no longer needed, without injecting unnecessary volatility into markets. That makes the next 12 months critically important.
The Fed has been allowing as much as $60 billion in maturing Treasury securities and $35 billion in mortgage-backed securities to roll off its balance sheet each month without reinvesting the proceeds, part of a broader process that started about 19 months ago. Such quantitative tightening has drained liquidity from the financial system — ostensibly the opposite of what was accomplished under QE — in the interest of “normalization.”
So far, the process has been going fine. Money markets — where the Cassandras tend to project most of their QT nightmares — have been functioning relatively well. For all the consternation about the increase in the secured overnight financing rate late last year, the blips proved small and short lived. Meanwhile, Treasury buyers have been able to absorb the increased government bond supply without major indigestion. And bank reserves have fallen some (as by design), but are still well above the levels that most policymakers consider “ample.”