How quantitative easing and tightening affect stocks

When the economy and particularly the labour market show signs of slowing down, central banks may step in and lower interest rates. In tough times, like the financial crisis of 2008–2009 or the pandemic of 2020, interest rate cuts by themselves may not be enough to stimulate the economy. In this situation, the central bank may decide to go beyond reducing interest rates and inject more money into the financial system, through quantitative easing. 

Here’s how quantitative easing works and what it means for investors:

• The central bank creates new digital reserves.
• The central bank uses these reserves to purchase government bonds from banks. In exchange, banks receive additional reserves in their accounts at the central bank.
• This process expands the central bank’s balance sheet and increases the reserves held by commercial banks, which can support easier credit conditions.
• Improved credit conditions and lower interest rates can encourage investors to invest more, favoring riskier assets with higher return potential.

The two major examples of QE were in 2008–2009 during the financial crisis and in 2020 during the pandemic. Both were associated with strong recoveries for the U.S. and Canadian equity markets in 2009 and 2020. Following the more recent episode of QE, Bitcoin had a remarkable run, going from about $3,500 at the March 2020 low to about $65,000 at the April 2021 high. The liquidity boost through QE can have an outsize effect on riskier assets.

Just as quantitative easing can add liquidity, quantitative tightening can remove liquidity. Here’s how quantitative tightening works and what it means for investors:

• The central bank stops buying government bonds and may also stop reinvesting the proceeds from maturing bonds.
• When bonds on the central bank’s balance sheet mature, the Finance or Treasury Department repays the principal to the central bank.
• To fund the principal repayment, the Finance or Treasury Department issues new bonds to investors. When investors purchase these bonds, funds are transferred from their bank accounts, which reduces commercial banks’ reserves at the central bank.
• This process decreases liquidity in the financial system and can contribute to tighter financial conditions.
• Businesses may scale back on riskier projects or delay expansion plans, due to higher borrowing costs and reduced access to credit.
• Investors, sensing reduced liquidity and tighter monetary policy, may rebalance their portfolios or sell higher-risk investments.

The U.S. Federal Reserve implemented QT alongside rate hikes through 2022. This period coincided with a sharp sell-off in U.S. tech stocks, with some names down roughly 50% on the year. Quantitative tightening by itself was not necessarily a knockout blow for markets, since stocks rallied from 2023 to 2025 and Bitcoin rallied from 2023 to 2024, even though quantitative tightening remained in effect until December 2025.¹ But in 2022, the combination of QT and rate hikes was too much for U.S. tech stocks to overcome.

Central banks like the Federal Reserve may keep their balance sheet at relatively constant levels for long periods, neither expanding with quantitative easing nor contracting with quantitative tightening. Think of QE and QT as exceptional measures, which central banks may apply when interest rate policy by itself is not doing enough to stimulate or cool the economy.

The most recent period of quantitative tightening in the U.S. ended in December 2025.² The period after quantitative tightening ends can be choppy, as investors try to figure out whether the central bank will keep its balance sheet at the same level or expand it with quantitative easing. Yet governments and central banks may not always openly say they’re going to do quantitative easing, since its reputation is rather mixed. Some critics argue QE can inflate asset values and may increase the temptation for governments to run deficits, knowing the central bank will absorb some of the debt. Others note QE’s role in stabilizing financial conditions during shocks.

As a result, governments and central banks may pursue some of the liquidity goals of quantitative easing without formally announcing a QE program. In the United States, for example, the Treasury Department can get more money into the banking system by spending sooner from its main account at the Federal Reserve, the Treasury General Account. The Federal Reserve can make short‑term borrowing easier for banks by lowering the cost of its lending programs or by accepting a wider range of assets as collateral. And the Treasury Department can issue more short‑term Treasury bills, which banks often buy and use to support their lending.

The bottom line: liquidity is a key driver of financial markets. What matters for investors is whether liquidity is rising or falling, regardless of how central banks and governments choose to describe it.

Investors with long-term strategic asset allocations may choose not to adjust their portfolio at all because of changing liquidity conditions. However, investors with a shorter time horizon or with exposure to highly volatile, growth-oriented assets may consider adjusting their portfolio based on liquidity conditions. Even for these hands-on investors, making changes based on liquidity conditions is typically about adjusting to major pivots in financial conditions, not trading based on every central bank move. 

Based on this context, here are some general insights:

• If investors expect financial conditions to tighten, they may allocate less to equities and growth assets, within their normal range; include defensive equity strategies; or give winners less room to run before rebalancing.
• If investors expect financial conditions to ease, they may allocate more to equities and growth assets, within their normal range; include growth-oriented equity strategies; or give winners more room to run before rebalancing.

Note: For information only. Review alongside your risk tolerance and time horizon.

• To understand liquidity in the financial system, investors should look both at interest rates and what central banks are doing with their balance sheets — staying the same, expanding with QE or tightening with QT.
• The combination of interest rate cuts and quantitative easing can be supportive for risk assets. A recent example of this was in 2020–2021, when global equity markets rallied on a tide of liquidity provided by central banks to boost recovery from the pandemic.
• The combination of interest rate hikes and quantitative tightening can be restrictive for risk assets. A recent example of this was in late 2022, when some well-known U.S. tech stocks sold off by 50% or more.
• Central banks may go for long periods without doing quantitative easing or tightening. The period after QT ends can be choppy, as investors try to work out whether the central bank will keep its balance sheet at the same level or expand it with QE.
• Keeping an eye on liquidity conditions can be useful for investors with shorter-term horizons or exposure to higher-risk assets, helping to inform decisions around asset allocation, strategy selection and rebalancing.