The Federal Reserve cleans up its money-printing mess

At this point, almost everyone in global markets is familiar with the notion of higher-for-longer interest rates. Soon, they are likely to meet another concept as important for understanding central-bank policy: less-for-longer quantitative tightening (QT). This phrase describes how the Federal Reserve intends to continue reducing its assets to undo its huge bond purchases during the covid-19 pandemic. It hopes that a less-for-longer approach will ultimately leave it with a smaller balance-sheet than would otherwise be the case.

This may all seem quite technical. Indeed, in one metaphor much liked by Fed officials, tracking QT should be as interesting as watching paint dry. But the very dullness—if it remains that way—has crucial implications, because it would help to make balance-sheet expansion and contraction a staple in central banks’ tool kits for staving off financial crises. Although other monetary authorities are also in the midst of QT, the Fed plays a dominant role in this experiment as the central bank for the world’s biggest economy.