The article discusses the global trend of quantitative tightening (QT), where central banks are reducing their bond holdings and decreasing liquidity in financial markets. This is a first-time occurrence, as QT has never been implemented globally before. The main advanced-economy central banks, including the Federal Reserve, European Central Bank, Bank of Canada, and Bank of England, are all engaged in some form of QT.
The article highlights the varying approaches to QT among these central banks. The Fed is widely expected to quit its program in the coming months, while the Bank of Japan only just kicked off its initiative. The ECB has stopped reinvesting some of the bonds it holds when they mature, but still sees a need to maintain some holdings.
The article also notes that the main risk of QT is volatility and market instability. With public debt levels having soared during COVID-19, some observers see the risk of governments putting pressure on central banks to scale back QT to retain their support for government bond markets.
Some key points from the article include:
- The global QT trend has never been seen before, making it a first-time occurrence.
- Central banks are reducing their bond holdings and decreasing liquidity in financial markets through QT.
- The Fed is expected to quit its program in the coming months, while the Bank of Japan only just kicked off its initiative.
- The ECB has stopped reinvesting some bonds but still sees a need to maintain some holdings.
- The main risk of QT is volatility and market instability.
- Governments may put pressure on central banks to scale back QT to retain their support for government bond markets.
