Quantitative Tightening (QT; Reverse QE)
“Quantitaive easing” (QE) increases the money supply. A “reverse QE” is “quantitative tightening” (QT). “Hard to do QE with QT (qualitative tightening)” was cited on Twitter on March 24, 2009. “As Fed looks at quantitative tightening (QT)” was cited on Twitter on May 10, 2010.
Financial Times—Alphaville explained on November 12, 2010:
“Quick explainer: QT is what HSBC’s senior FX strategist Daniel Hui et al are calling quantitative tightening — a.k.a. the opposite of quantitative easing.”
In August 2015, China decided to sell many of its holdings in United States Treasurys. Bloomberg Business stated:
“In the words of Deutsche Bank AG strategist George Saravelos and colleagues, welcome to the world of ‘quantitative tightening.’”
Wikipedia: Quantitative easing
Quantitative easing (QE) is a type of monetary policy used by central banks in the purported attempt to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.
Twitter
Christian G.
@InEgo_
@bondscoop It’s quite difficult for them right now. Hard to do QE with QT (qualitative tightening) 😉
4:21 PM - 24 Mar 2009
Twitter
Duke
@DukeStJournal
As Fed looks at quantitative tightening (QT), realizing “Bernanke iz a QT” is a doodle in a Trapper Keeper at the nerdiest high school ever.
4:12 PM - 10 May 2010
Financial Times—Alphaville
Why QT, not QE, is the risk
Izabella Kaminska
Nov 12 2010 17:05
A plan for a plan is not a plan, says HSBC on Friday.
And this is the reason why QT is the risk now, not QE.
Quick explainer: QT is what HSBC’s senior FX strategist Daniel Hui et al are calling quantitative tightening — a.k.a. the opposite of quantitative easing.
Twitter
Elliot Turner
@ElliotTurn
@hedgefundinvest aka reverse QE…more like QT…
4:18 PM - 31 May 2012
Twitter
Andy Harless
@AndyHarless
@leighblue But the Fed, if its preferences are unchanged, should automatically do $1t of reverse QE (QT?). Just a minor annoyance.
7:18 PM - 9 Jan 2013
Zero Hedge
What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse
Submitted by Tyler Durden on 08/28/2015 03:45 -0400
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So in effect, China’s UST dumping is QE in reverse - and on a massive scale. Facing this kind of pressure the FOMC will at the very least need to exercise an exorbitant amount of caution before tightening policy and at the most, embark on another round of asset purchases lest China’s devaluation and attendant FX interventions should be allowed to decimate whatever part of the US “recovery” is actually real.
Zero Hedge
Why QE4 Is Inevitable
Submitted by Tyler Durden on 08/28/2015 22:51 -0400
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Needless to say, this “reverse QE” as we call it (or “quantitative tightening” as Deutsche Bank calls it) has serious implications for Fed policy, for the timing of the elusive “liftoff”, and for the US economy more generally. Of course we began detailing the implications of China’s Treasury liquidation months ago and now, it’s become quite apparent that analyzing the consequences of China’s massive FX interventions is perhaps the most important consideration when attempting to determine the future course of global monetary policy.
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Fast forward to today and the market is re-assessing the outlook for China’s “QE”. The sudden shift in currency policy has prompted a big shift in RMB expectations towards further weakness and correspondingly a huge rise in China capital outflows, estimated by some to be as much as 200bn USD this month alone. In response, the PBoC has been defending the renminbi, selling FX reserves and reducing its ownership of global fixed income assets. The PBoC’s actions are equivalent to an unwind of QE, or in other words Quantitative Tightening (QT).
Bloomberg.com
Welcome to Quantitative Tightening as $12 Trillion Reserves Fall
Simon Kennedy
September 2, 2015 — 3:44 AM EDT Updated on September 2, 2015 — 12:27 PM EDT
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Each means central banks are either paring their reserves to offset an exit of capital or manage currencies, have less money flowing into their economies to salt away or no longer need to sit on as much. Whichever it is, the shrinking of reserves means much less money flowing into the financial system given authorities tended to recycle their cash piles into local currency or liquid assets such as bonds.
In the words of Deutsche Bank AG strategist George Saravelos and colleagues, welcome to the world of “quantitative tightening.”
Forbes.com
SEP 3, 2015 @ 11:54 AM 1,641 VIEWS
‘Quantitative Tightening’ Is A Myth (But That Doesn’t Mean There Isn’t A Problem)
Frances Coppola
Deutsche Bank has frightened everyone by warning that if China sold substantial quantities of US Treasuries (USTs) to support the yuan, this would amount to a substantial tightening of US monetary policy.
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When PBoC sells USTs for dollars, what does it do with the dollars? It’s hardly going to put them in vaults, or dollar deposit accounts – after all, USTs are a far more convenient form of storage. No, it sells them straight back into the markets again in exchange for yuan. It is not exchanging USTs for dollars that supports the yuan versus the dollar, it is sales of dollars in exchange for yuan. So the net effect is that dollar liquidity does not change, UST supply increases and yuan liquidity decreases. As China’s USTs are mainly short-term, this is like a helicopter drop of short-term USTs. And since short-term USTs are really only dollars in another form, this is clearly monetary loosening.
Real Clear Markets
September 5, 2015
Meet ‘QT’, Quantitative Easing’s Evil Twin
By Peter Schiff
There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet “Quantitative Tightening,” the pesky, problematic, and much less disciplined kid brother of “Quantitative Easing.” Now that QE is ready to move out…QT is prepared to take over.
Investment Week (UK)
How ‘quantitative tightening’ could prompt a more dramatic equity exodus
James Sullivan
07 SEPTEMBER 2015
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Principally, in order to counteract economic stresses, reserves are drawn down to offset capital flight or manage currency valuations. Global liquidity specialist CrossBorder Capital suggests that capital flight from emerging markets has reached $1trn in the past year alone (although this number has been disputed by other parties).
With so much imbalance in the world, it is of little surprise that this behaviour is back in play. This means there is less money within the financial system, as reserves are typically used to buy liquid assets such as equity or debt.
This practice has been coined “quantitative tightening” by the strategists at Deutsche Bank, who also predict that, after an extended period of global growth, 2014/15 has marked the peak of reserve accumulation, with China alone having reduced its holdings from $4trn to $3.7trn in the last year. Other emerging economies are mirroring this precedent in order to keep up.