In plain terms — QE expands assets and reserves through purchases; QT reduces the balance sheet through maturities or sales. Stock, flow and composition differ.
Purchases, reinvestment, maturities, reserves and balance-sheet composition, distinguishing flows from stocks and shortcuts about liquidity.
What it actually observes
QE purchases assets and changes the composition and duration of risk held by the public. QT reduces the portfolio through non-reinvestment, maturities or sales; monthly flow and balance-sheet stock are different quantities.
Purchases credit reserves to banks, which remain central-bank liabilities. Reserves, household deposits and spending are not the same thing and should not be connected by an automatic multiplier.
Operational reading
Read the programme's legal basis, eligible assets, gross pace, reinvestments and maturity caps. The balance-sheet total may conceal temporary facilities, movements in the Treasury account or changes in other liabilities.
For markets, track duration removed, term premia, liquidity and functioning. An announcement matters relative to expectations and net bond supply, not only through the nominal purchase amount.
Worked interpretation
A balance sheet can shrink while a temporary facility raises reserves; the total hides composition and collateral.
Advanced level
Portfolio balance, signalling of the rate path and market functioning are distinct channels. Their importance changes when markets are stressed or reserves approach scarcity for the banking system.
QT analysis integrates Treasury issuance, intermediary demand and the distribution of reserves. The same balance-sheet reduction can have different effects across compositions and operating regimes.
Limits and common errors
Balance-sheet size, reserve quantity and spendable liquidity are not equivalent. Attributing every yield move to QE or QT ignores guidance, fiscal issuance, risk premia and global conditions.
Sources
- Federal Reserve, Credit and Liquidity Programs and the Balance Sheet, official documentation — disclosures and background on Fed assets, liabilities, liquidity facilities and crisis-era programmes.
- ECB, Asset purchase programmes, official documentation — programme rules, holdings, redemptions and reinvestment data for Eurosystem asset purchases.
- Bank of England, Quantitative easing, official documentation — an institutional explanation of asset purchases and their intended economic effects.