Definition
The reverse of QE — the central bank reduces its balance sheet by letting bonds mature without replacement, draining liquidity.
During QT, the Fed allows Treasury and MBS holdings to roll off at maturity without reinvesting the proceeds. This reduces bank reserves and contracts system liquidity. The 2022-2024 QT ran at up to $95B/month ($60B Treasuries + $35B MBS). Cumulative QT of $1T+ tends to create measurable headwinds for risk assets, especially when combined with rising rates.