Quantitative tightening step-by-step

:ROAM_REFS: https://fedguy.com/quantitative-tightening-step-by-step/?utm_source=rss&utm_medium=rss&utm_campaign=quantitative-tightening-step-by-step

tags
Monetary systems

This is a follow-up on Quantitative Easing step-by-step.

The chain goes as follows:

  1. Investor wants to buy treasuries with deposit (swap)
  2. Bank settles payment (deposit -> reserve) with treasuries | reduces reserves and deposit liabilities
  3. Treasury issues new UST -> gets payment in reserve -> pays Fed for UST | nothing changes
  4. Fed extinguishes the reserves
  • The Fed has no idea what the QT is actually doing, and has changed strategy several times before stopping
  • The Fed had no idea how much reserve banks need
  • Banks have too much reserve
  • Fed stopped QT because Repo rate exploded (it has no idea why) and even restarted QE
TODO Why did

repo rate explode in 2019 if banks have too much reserve? #

  • reserve may be non-uniformly spread out, so QT lead to a reserve crisis for small banks but not for larger ones.
  • Pas assez de dette à horison < 1y
  • JPM aurait fait exprès de ne pas sortir l’argent pour faire exploser le repo et le QT avec