Once again this year, we would like to sweeten the Advent season for our readers with an Advent calendar. In a slightly different form, each door contains a “knowledge bomb”, which will be supplemented with an extraordinary special prize on Christmas Day.
Behind the thirteenth door is the term “Quantitative Tightening”. To enter the giveaway on the 24th, simply participate in the polls and like the respective Twitter posts.
Quantitative Tightening
The financial crisis in 2008 marked the beginning of a new era in U.S. monetary policy. Minting an aggressive expansion of the money supply under the Quantitative Easing (QE) program, the markets have been extensively supplied with liquidity by the Federal Reserve for more than a decade. Despite the loose monetary policy, this has not led to a general inflation problem so far. This has changed dramatically in the recent past, with registered inflation figures in the high single digits to low double digits. One of the most plausible explanations is that the transmission mechanisms have not worked as expected, as QE has often been used in unproductive ways, with companies using the low bond yields for share buybacks rather than growth initiatives.
It took a global pandemic to expose the fragile global logistics network and reveal significant supply bottlenecks. This circumstance ultimately helped push inflation to levels not seen in the U.S. since 1982. The situation prompted the Fed to scale back its expansionary monetary and interest rate policies about a year ago – ushering in the era of quantitative tightening (QT). By raising interest rates and gradually selling off its investment holdings, the Fed has drawn liquidity out of the markets over the past 12 months.
