A few weeks ago, I put out a post explaining the basics of Fedspeak, the cryptic language the Fed members use to signal to each other, to banks, and to the general public what they intend to do in the near future, and then to actually put those plans into action when they make official announcements of those plans. In that explainer, I mentioned two terms that are so important to what the Fed does as an institution, and to us, ordinary Americans, that I decided to write a more detailed explainer, about those two terms specifically: the difference between quantitative easing and tightening.
Quantitative easing (QE) and quantitative tightening (QT) are two monetary policy tools that central banks use to influence the money supply and interest rates. QE involves buying assets from banks and other financial institutions, while QT involves selling assets.
QE is used to stimulate the economy when it is in a recession. By buying assets, central banks inject money into the economy and make it easier for banks to lend money. This can lead to lower interest rates and more borrowing, which can help to stimulate economic growth.
QT is used to control inflation. When the economy is growing too quickly, inflation can rise. By selling assets, central banks take money out of the economy and make it more expensive for banks to lend money. This can lead to higher interest rates and less borrowing, which can help to control inflation.
QE and QT can have a significant impact on the economy (as we saw when there were COVID stimulus checks going out, and now the steady increases in interest rates more recently). They can also be complex and difficult to understand. However, they are important tools that central banks use to manage the economy.
Here is a table that summarizes the key differences between QE and QT:
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