2) QT is unlikely to reverse fully the impact of QE on long-term interest rates
By buying long-term bonds and mortgage-backed securities, the Fed expected quantitative easing to push money into areas such as corporate bonds, thereby lowering corporations’ borrowing costs and, it hoped, sparking the productive use of capital. The Fed’s own research suggests that at its peak impact, QE lowered yields on 10-year US Treasuries by 100 basis points (bps), although other academic studies have disputed that the impact was this large.
QT can be expected to reverse some of this impact, but we do not expect it to raise long-term rates by 100 bps. As noted above, the reduction in the balance sheet will be far smaller than the expansion that preceded it. The evidence so far suggests that there has been no persistent trend toward a higher term premium. And, in fact, during 4Q18 when investors appeared most concerned that QT was having an adverse impact on risk assets, the term premium fell.