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Back to normal? Assessing the Effects of the Federal Reserve's Quantitative Tightening

Author

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  • Francesco Casalena

    (Geneva Graduate Institute)

Abstract

We study the effects of the Federal Reserve's two Quantitative Tightening (QT) programmes implemented over the last decade. We use a high frequency identification strategy to distinguish between conventional monetary policy shocks, Treasury borrowing announcement shocks and the unwinding of the balance sheet. Further, we analyse both QT announcements and operations. Our results show that the Fed was successful in muting the signalling effect of its Balance Sheet Policy (BSP) announcements, as statements not containing quantitative information about QT did not impact significantly asset prices. Conversely, communications disclosing information over the size and the pace of QT had an effect on financial markets. We also find that QT operations have a significant and persistent deflationary effect on interest rates and asset prices. A 1-trillion USD reduction in securities holdings by the Fed is associated with an increase in 10-year Treasury yields by 2 percentage points. While the contractionary effects of QT have so far been at least partially offset by liquidity operations that have expanded the supply of reserves, our results suggest that balance sheet reductions entail in principle strong negative effects on financial markets. Although QT does not represent in the policymakers' view the primary tool to achieve price stability, it is yet far from running quietly in the background of the monetary policy stance.

Suggested Citation

  • Francesco Casalena, 2024. "Back to normal? Assessing the Effects of the Federal Reserve's Quantitative Tightening," IHEID Working Papers 14-2024, Economics Section, The Graduate Institute of International Studies.
  • Handle: RePEc:gii:giihei:heidwp14-2024
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    References listed on IDEAS

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    More about this item

    Keywords

    Quantitative Tightening; Central Bank Balance Sheet; Unconventional Monetary Policy; Local Projections;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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