QT2 begins. What is Quantitative Tightening?
A monetary policy explainer, and a quest to understand the impacts of the Fed's balance sheet expansions and contractions.
Dear readers,
The Fed prints money, therefore we must own bitcoin to protect ourselves from theft via debasement. Right? Yes, I do believe that. But what must be said when the Fed is doing the opposite of money printing? And do we still call it printing when there is no printer involved? Today’s post takes a closer look at the Fed’s money creation and destruction activities in honor of the beginning of QT2, or the second iteration of a Federal Reserve balance sheet reduction program called Quantitative Tightening.
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The Fed’s monetary policy
The Federal Reserve aims to moderate cyclical growth and inflation, in both directions, via its monetary policy. When the economy is strong and inflation is increasing, the Fed attempts to slow the economy down. When the economy is weak, the Fed tries get things going again. Historically, the Fed implemented its policy by raising and lowering the interest rate at which banks can borrow from and lend to each other. This rate is called Fed Funds. The idea is that the Fed Funds rate represents the lowest-risk activity for a bank, allowing the Fed Funds rate to function as a floor for interest rates throughout the economy.
When the economy overheats, inflation becomes a problem. To control inflation, the Fed adopts a contractionary monetary policy by increasing the Fed Funds rate. This decreases the ability for economic actors to borrow and thereby slows the growth of the economy. When the economy slows down too much, the Fed adopts an expansionary monetary policy by reducing the Fed Funds rate. This makes it easier for consumers and businesses to borrow, boosting the economy.