Key points
- QE adds liquidity, QT removes it.
- Liquidity crises cause sharp selloffs.
- Low liquidity amplifies volatility.
Example
A sudden widening of bid-ask spreads and elevated FRA-OIS can signal liquidity stress that may spill into equities and credit.
In history
The dash for cash in March 2020 froze credit markets until the Fed backstopped funding; QT in 2022–2023 drained reserves and tightened conditions.
Related terms