Quantitative tightening is no substitute for higher interest rates

CENTRAL BANKERSQEQEQTQTQEQT.QT almost everywhere are tightening monetary policy to fight inflation. Markets expect interest rates to rise by about a percentage point in America and Britain, and by a tenth of a point in the euro area, over the course of the year. But modern central bankers have more than one lever at their disposal. Many in the rich world are preparing to put into reverse the almost $12trn of quantitative easing (), or bond-buying, they have conducted during the pandemic. On January 26th the Federal Reserve said it would end soon and gave guidance for the first time about how it might shrink its balance-sheet, a process dubbed quantitative tightening (). Reversing trillions of dollars of asset purchases might seem like a powerful way to contain inflation. In fact will be an unreliable tool.Having cut interest rates nearly as far as they could go during the global financial crisis of 2007-09, central banks began experimenting with , which was a relatively new and poorly understood tool. But when the time came to tighten they preferred to follow the normal path and raise interest rates, rather than risk the unknown by starting So they maintained the size of their balance-sheets by reinvesting the proceeds from maturing bonds. It was not until rates hit 1-1.25% in late 2017 that the Fed let its balance-sheet “run off”, by stopping reinvestments. The Bank of England in 2018 said it would start after rates hit 1.5%—a threshold it never reached.