Quantitative Tightening

Quantitative tightening means a central bank reduces the size of its balance sheet by allowing assets to mature or by selling assets. In simple terms, quantitative tightening removes liquidity from the financial system. Quantitative tightening is important because it can push yields higher, reduce market liquidity, and make financial conditions tighter. Investors watch it because it can affect bonds, stocks, and credit markets. For example, if the Fed allows Treasury bonds it owns to mature without reinvesting the proceeds, that is a form of quantitative tightening. Quantitative tightening is not the same as raising interest rates. It works through the balance sheet rather than directly changing the policy rate.