Quantitative tightening
Shrinking the central bank's balance sheet by letting securities mature without replacing them — a withdrawal of base money, usually without sales.
Quantitative tightening is usually passive. The Fed holds Treasury securities and mortgage-backed securities that mature on a schedule; rather than reinvesting the proceeds into new securities, it allows a set amount to roll off each month. The balance sheet shrinks without anything being sold.
That distinction matters for how it is reported. “The Fed is selling bonds” is generally not what is happening. Runoff caps set the maximum that is allowed to mature without reinvestment in a month, and the actual reduction can be smaller if less than that matures. Tightening that can only go as fast as the calendar is a slower instrument than the easing that created the stock.
The reserves that disappear were never currency in a wallet. They are still a withdrawal of base money. QT is the Committee choosing a smaller balance sheet, just as QE was choosing a larger one. New borrowers can pay more; existing holders of long bonds can lose on price. There is no free setting. See the side-by-side explainer.
A worked example
Suppose the Fed holds a $40 billion Treasury bond that matures on the 15th. Under a runoff cap of $25 billion a month, it lets $25 billion mature without buying replacements and reinvests the other $15 billion. Treasury pays the Fed $40 billion at maturity; $25 billion of that simply extinguishes reserves, and the balance sheet shrinks by $25 billion on both sides. Nothing was sold, no price was pushed down by a sale, and the reserves that disappear were never in circulation. The amounts are a worked example of the mechanism.
If only $20 billion matures that month, only $20 billion runs off — the cap is a ceiling, not a target.
How to read it in coverage
“The Fed is selling bonds” almost never describes QT; “letting bonds roll off” does. The monthly caps are announced and changed rarely, so QT proceeds in the background of rate decisions rather than being decided at each meeting. When coverage says the Fed “slowed QT”, it means the cap was lowered. The pace is visible as the slope of the balance sheet series.
QT is how the Fed has unwound the holdings it accumulated through quantitative easing. It runs in the background of rate decisions rather than being announced meeting to meeting.