Monetary Policy
Quantitative easing
Quantitative easing
When the economy is struggling, the government releases a massive amount of money into the market through quantitative easing to induce a recovery. Tightening is the opposite of quantitative easing, meaning it reduces the inflow of money circulating in the market.
In a typical yield curve, the farther out you go, the higher the interest rate. The central bank adjusts the overall curve by controlling the ultra-short-term rate at the very front, but even if it adjusts the ultra-short-term rate, long-term rates may not come down. In such cases, the central bank directly buys long-term bonds to cap overall government bond yields — this is called quantitative easing.
In other words, the central bank buys long-term government bonds
quantitative tightening
Quantitative tightening
It refers to absorbing market liquidity by not reinvesting when bonds purchased by the central bank mature, or by selling its holdings before maturity. It is the opposite concept of quantitative easing (QE: Quantitative Easing).
Along with raising the benchmark interest rate, it is a major tightening tool used by the Fed.
Different from tapering.
tapering
Tapering
It is the act of slowly turning off a faucet. If quantitative tightening is the brake, tapering is like taking your foot off the accelerator to reduce speed.
It refers to gradually reducing the scale of buying long-term government bonds that were purchased during quantitative easing.
So why taper? Abruptly turning it off can shock the market. After Lehman, the Fed carried out QE1, and when it suddenly cut it all off without tapering, the Greek fiscal crisis erupted. So it did QE2 again, and when it stopped, the Southern European fiscal crisis erupted (PIIGs).
Topics: Fed
Category: Wiki/Economy