What is QT? This is something that many investors tend to overlook, even though it can significantly impact the money and capital markets.

When the central bank announces QE, everyone knows that money will flow into the system, and asset prices will rise. But when it comes to QT, which is the opposite of QE, most people seem to pay less attention, even though it can have equally impactful effects.

Simply put, QT is the process of pulling money out of the economy. When the situation returns to normal, the central bank cannot continue doing QE indefinitely because it would cause the central bank’s balance sheet to expand uncontrollably. On the other hand, prolonged money injections can lead to difficult-to-control inflation. Therefore, the end of QE must be followed by QT.

There are two types of QT. The first is Passive Tightening, which involves letting the assets held by the central bank simply mature without reinvestment. This method pulls money out of the system without significantly affecting the market. The second is Active Tightening, which involves directly selling assets. This method has a greater market impact because the central bank acts as a market participant.

Looking back into history, the first instance of QT occurred after the 2008 financial crisis. Federal Reserve Chair Ben Bernanke conducted three rounds of QE between 2009 and 2014, totaling over $4 trillion. In 2013, the Fed announced plans to reduce QE, which triggered the "Taper Tantrum." Investors panicked and sold bonds rapidly, causing bond prices to fall, yields to rise, and volatility to spike across markets. Although QE reductions hadn’t officially started yet, the market reacted to the expectations.

Actual QT began in 2015 when Janet Yellen was Fed Chair. The Taper Tantrum not only affected U.S. bond markets but also emerging stock markets. In 2013, the Thai stock market dropped 22.29%, the Philippines 21.2%, and Indonesia 18.18%.

The second QT episode occurred in March 2020, when the world was shocked by the COVID-19 pandemic. The Fed announced QE measures totaling over $700 billion in the first month. This round of QE lasted from 2020 to 2021, with the most benefited assets being technology stocks and cryptocurrencies.

By the end of 2021, inflation signals began to appear. The Fed announced plans to reduce QE, decreasing bond purchases from $80 billion to $70 billion per month, and MBS purchases from $40 billion to $35 billion. In December 2021, they accelerated QT, reducing bond purchases to $50 billion and MBS to $25 billion per month.

The result of this QT was the appearance of an inverted yield curve in the U.S. bond market. Bond yields surged immediately, and previously rising technology stocks and cryptocurrencies quickly declined. In 2022, NASDAQ fell by 34.08% from its peak, and Bitcoin dropped by 65.94%.

What’s most interesting is the side effect that’s hard to see: inflation, which affects everyone—investors and ordinary people alike. Therefore, QT is a measure that also comes with a cost.

For investors, understanding what QT is and how it impacts the market is crucial because it helps identify opportunities and protect portfolios at the right times. Central banks will continue to use these tools in the future, so tracking and understanding their monetary measures is an essential part of investment strategy.