How Many Rate Hikes Does Quantitative Tightening Equal?
Summary:
In this article, I examine the question of how to quantify the equivalence between interest rate hikes and quantitative tightening (QT). Using a simple "preferred habit" model I estimate that a $2.2 trillion passive roll-off of nominal Treasury securities from the Federal Reserve's balance sheet over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times, but 74 basis points during turbulent periods.
Key findings:
- The author quantifies how many interest rate hikes quantitative tightening (QT) equals.
- He estimates that a $2.2 trillion passive roll-off of nominal Treasury securities from the Federal Reserve's balance sheet over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times, but 74 basis points during crisis periods.
Center Affiliation: Center for Quantitative Economic Research
JEL classification: E43, E44, E52, E58, G12
Key words: monetary policy, quantitative tightening, QT, quantitative easing, QE, rate hikes, preferred-habitat
https://doi.org/10.29338/ph2022-11
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