Federal Reserve Assets: 26 Months Quantitative Tightening Since Q1 2022

Quantitative Tightening (QT) serves as a monetary policy tool employed by central banks, such as the Federal Reserve in the United States, aimed at reducing the size of their balance sheets and withdrawing liquidity from the financial system. This stands in stark contrast to Quantitative Easing (QE), wherein central banks purchase financial assets, such as government bonds, to infuse liquidity into the economy.

During the process of Quantitative Tightening, the central bank either sells assets from its balance sheet or allows them to mature without reinvesting the proceeds. This action effectively diminishes the amount of money in circulation and can trigger various economic impacts, including higher interest rates and reduced liquidity.

In response to the COVID-19 pandemic, the Federal Reserve's balance sheet experienced a substantial expansion, increasing by 115% from $4.159 trillion in February 2020 to $8.937 trillion in March 2022. Subsequently, as part of the quantitative tightening measures, the Federal Reserve's balance sheet contracted by 18.3% to $7.304 trillion by May 2024. During this quantitative tightening phase, the Federal Reserve's balance sheet decreased by $1.633 trillion, with treasury securities witnessing a reduction of $1.272 trillion (comprising 78% of the total reduction) and mortgage-backed securities declining by $343 billion (constituting 21% of the total reduction). Notably, from March 2022 to May 2024, treasury securities decreased by 22.1%, while mortgage-backed securities (MBS) declined by 12.6%.

This pattern mirrors previous actions by the Fed. During crises such as those in 2008 and 2020, a substantial amount of stimulus is promptly injected into the economy. However, once the crisis abates, the Federal Reserve exhibits reluctance or perhaps inability to swiftly reverse course. The removal of prior stimulus measures and the return to a state of normalcy appear to be slow and protracted processes.