Nearly every discussion of Federal Reserve policy here elicits letters from readers who ask why more isn’t being made about the reduction of the central bank’s balance sheet—so-called quantitative tightening—while increases in short-term interest rates get all the attention of market participants and analysts.
To give away the ending: The Fed’s QT has had relatively little effect on financial conditions since it got under way last year. And in a surprising twist, the new battle over the nation’s debt limit will largely negate any impact QT might produce. Indeed, hitting the debt ceiling is likely to produce an easing in financial conditions that runs contrary to the Fed’s anti-inflation policies.