Lesson 8 of 8
QE, QT & The Yield Curve
The Fed's balance sheet tools and what the yield curve signals
QE (Quantitative Easing)
Fed BUYS bonds, injecting cash
Pushes interest rates lower
Inflates asset prices (stocks, housing)
Used in 2008, 2020 crises
QT (Quantitative Tightening)
Fed SELLS or lets bonds mature
Drains cash from the system
Puts downward pressure on asset prices
2022-2025: reduced balance sheet by $2.4T
Peak balance sheet
$8.9T
June 2022
QT reduced by
$2.4T
over 2.5 years
Current
$6.5T
still 60% above pre-COVID
The yield curve plots interest rates from short-term to long-term. Normally it slopes up (longer = higher rate). When it inverts (short rates above long rates), it has predicted every recession since 1955. The 2022-2024 inversion was the longest in history, but no recession came.
Normal yield curve
Short rates lower than long rates
Economy is healthy and growing
Banks can profit by lending long
Signals confidence in the future
Inverted yield curve
Short rates ABOVE long rates
Predicted every recession since 1955
2022-2024: longest inversion in history
Signal weakened by post-COVID distortions
current state
QT ended in December 2025. The Fed is now doing 'reserve management purchases' to keep the system stable. The yield curve has finally un-inverted after 27 months, with the 10yr at 4.34%.
Check yourself
What is QE (Quantitative Easing)?