I just noticed that many people talk about QT, but it seems there are many misunderstandings. In fact, QT stands for Quantitative Tightening, which is the opposite measure of QE.

This measure is not new, but it’s not talked about as much as QE. Yet, its impact on the market is just as severe. When the central bank announces QE, everyone knows that money will flow into the system, asset prices rise. And what about QT? It’s about pulling money out of the system.

Simply put, QT is a measure that causes liquidity to contract, opposite to QE which increases liquidity. During a crisis, the central bank will buy bonds and low-risk assets to inject money into the system. But in normal times, the central bank cannot continue QE because it would cause its balance sheet to expand endlessly. Moreover, prolonged money printing leads to inflation that’s hard to control. When the time comes, they need to stop and withdraw money.

There are two types of QT. The first is called Passive Tightening, which is letting the bonds held mature without reinvesting. This gradually pulls money out without much market impact. The second is Active Tightening, which involves selling assets outright. In this case, the central bank acts as a seller in the market, and the impact on the US money and bond markets (which are over $46 trillion) can be quite significant.

Looking at the history of QT makes the picture clearer. The first instance was in late 2013 when Fed Chair Ben Bernanke announced plans to reduce QE. Investors were shocked and rushed to sell bonds, causing prices to fall and yields to spike, leading to chaos known as the Taper Tantrum. Although they hadn’t actually reduced QE yet, the impact was felt. Emerging markets across Asia also fell: Thai stocks dropped 22.29%, the Philippines 21.2%, Indonesia 18.18%.

Then in 2020, the COVID-19 shock hit the economy. The Fed launched another round of QE, injecting over $700 billion. Money flooded into the system, tech stocks and crypto soared wildly. But by 2021, inflation started rising, and the Fed announced reducing QE and accelerating QT. The result was a sharp impact: US bonds inverted, tech stocks and crypto declined heavily. In 2022, NASDAQ fell 34.08%, Bitcoin dropped 65.94%.

Importantly, QT is a measure that not only causes market volatility but also has side effects that are hard to control—namely inflation, which affects everyone, whether investors or ordinary people.

Understanding these central bank monetary measures actually helps identify investment opportunities and know when to protect your portfolio. In such volatile financial and capital markets, tracking signals from central banks is just as important as analyzing asset prices.