Quantitative Easing (QE) is a monetary policy used by central banks to buy assets in order to lower longer-term interest rates.

Quantitative Tightening (QT) is the opposite. It involves selling off those assets, which raises interest rates.

Quantitative Tightening has been implemented to unwind the massive number of bond holdings the Federal Reserve bought during the pandemic-driven recession when Quantitative Easing (buying bonds) was in place.

A quick history lesson: Between 2008 and 2014, the Federal Reserve became a massive buyer of Treasuries and mortgage-backed debt. This is Quantitative Easing at its finest, driven by the argument that it was necessary to maintain easy financial conditions for economic growth.

The Federal Reserve’s involvement in purchasing mortgage-backed securities extended beyond the scope of its traditional mandate. They needed to get rid of those bonds, and that is what Quantitative Tightening aims to accomplish.

The Treasury released their Refunding Announcement, which breaks down how much debt or Treasuries need to be issued in the coming quarters. Here is what the Treasury said:

They do not anticipate the need to increase the auction sizes (QT) for at least “the next several quarters”. This is an indicator of conditions typically associated with QE.

Bottom line: Mortgage rates are likely to drop this year. The extent of the decrease is uncertain, but it’s wise to be prepared.