Quantitative tightening is no substitute for higher interest rates

CENTRAL BANKERS 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 (QE), or bond-buying, they have conducted during the pandemic. On January 26th the Federal Reserve said it would end QE soon and gave guidance for the first time about how it might shrink its balance-sheet, a process dubbed quantitative tightening (QT). Reversing trillions of dollars of asset purchases might seem like a powerful way to contain inflation. In fact QT will be an unreliable tool.