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How Many Rate Hikes Does Quantitative Tightening Equal?

How Many Rate Hikes Does Quantitative Tightening Equal?

In March 2020, When the markets plunge due to COVID-19 pandemic uncertainty, the Federal Reserve stepped in, lowered the interest rates to near zero, and launched a suite of emergency lending programs, including an open-ended quantitative easing (QE) to support the economy and stabilize financial markets. As a result of this program, the US Federal Reserve (Fed)’s holdings of Treasury securities and mortgage-backed securities increased from $4.4 trillion in March 2020 to $8.5 trillion in March 2022.

Over the course of two years, the Fed snapped up some $3.3tn in US government bonds and $1.3tn in agency mortgage-backed securities. As of March 2022, US central bank owns a quarter of all outstanding Treasury debt and a third of agency MBS.

In May 2022, at The Federal Open Market Committee (FOMC), the Fed announced that it would start the process of shrinking its nearly $9 trillion balance sheet starting on June 1, 2022. This process of balance sheet reduction is often referred to as "quantitative tightening" (QT).