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How Many Rate Hikes Does Quantitative Tightening Equal?

Author

Listed:
  • Bin Wei
Abstract
In this article, I examine the question of how to quantify the equivalence between interest rate hikes and quantitative tightening (QT). Using a simple "preferred habit" model I estimate that a $2.2 trillion passive roll-off of nominal Treasury securities from the Federal Reserve's balance sheet over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times, but 74 basis points during turbulent periods.

Suggested Citation

  • Bin Wei, 2022. "How Many Rate Hikes Does Quantitative Tightening Equal?," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2022(11), July.
    • Handle: RePEc:fip:a00068:96689
    DOI: 10.29338/ph2022-11
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    References listed on IDEAS

    as
    1. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
    2. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 3-46, February.
    3. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 498-514.
    4. Stefania D'Amico & Tim Seida, 2020. "Unexpected Supply Effects of Quantitative Easing and Tightening," Working Paper Series WP-2020-17, Federal Reserve Bank of Chicago.
    5. Gilchrist, Simon & Wei, Bin & Yue, Vivian Z. & Zakrajšek, Egon, 2024. "The Fed takes on corporate credit risk: An analysis of the efficacy of the SMCCF," Journal of Monetary Economics, Elsevier, vol. 146(C).
    6. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
    7. Edmund Crawley & Etienne Gagnon & James Hebden & James Trevino, 2022. "Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion," FEDS Notes 2022-06-03-2, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monetary policy; quantitative tightening; QT; quantitative easing; QE; rate hikes; preferred-habitat;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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