Quantitative Tightening

How central banks shrink their balance sheets after years of bond buying, why they do it, and the risks for markets.

After years of quantitative easing, buying bonds to support the economy, central banks faced a new question: how to shrink their enormous balance sheets. The process is called quantitative tightening, or QT.

How QT works

Central banks can shrink their balance sheets in two ways:

Passive runoff: letting bonds mature without buying new ones to replace them. When a bond matures, the government repays the central bank, and the money disappears from the system.
Active sales: selling bonds to the market before they mature.

Most central banks, including the U.S. Federal Reserve, have mainly used passive runoff, with caps on how much can run off each month. The Bank of England also actively sold some bonds.

Why do QT?

Normalising policy: reducing the central bank’s large footprint in bond markets.
Tightening financial conditions alongside interest rate rises to fight inflation.
Creating room to use QE again in future crises.

Effects and risks

QT tends to push up long-term bond yields modestly, as the central bank is no longer a big buyer. It also reduces bank reserves. If reserves fall too far, short-term funding markets can come under stress. In September 2019, during an earlier round of QT, U.S. overnight funding rates spiked suddenly, and the Federal Reserve had to add liquidity. This experience made central banks cautious about how far to shrink.

Recent experience

The Fed began QT in 2022, reducing its balance sheet from around 9 trillion dollars. It slowed the pace in 2024 and 2025 as reserves declined, and ended its balance sheet reduction in December 2025. The European Central Bank and others also shrank their balance sheets.

Letting bonds mature

A central bank holds a government bond that matures this month. Instead of using the repayment to buy a new bond, it lets the money go. The government must now sell that bond to private investors instead. Private buyers must absorb more government debt, which can nudge interest rates up. Repeat this across many bonds, and the balance sheet shrinks gradually.

Thinking QT is simply QE in reverse with equal effects

Economists debate whether QT has effects of the same size as QE. QE was often used in crises, when it had strong calming effects; QT happens gradually in calmer times, and its effects may be smaller and harder to measure.

Key takeaways

Quantitative tightening shrinks central bank balance sheets after QE.
It usually happens through passive runoff of maturing bonds.
QT can raise long-term yields and reduce bank reserves.
A 2019 funding market spike showed the risks of shrinking reserves too far.