QE and QT
Beyond the policy rate, the Fed steers conditions with its balance sheet. Quantitative easing buys Treasuries and MBS — pushing long rates down and flooding the system with reserves. Quantitative tightening lets the portfolio run off — draining reserves and letting term premium normalize.
Why it bends the signals
QE compresses term premium mechanically, which can invert the curve without any change in rate expectations — one of the legitimate critiques of the 2022–24 inversion signal. Symmetrically, QT can tighten financial conditions in ways the funds rate alone misses.
The interaction with our panel
Balance-sheet policy shows up in the monitor indirectly: through term-premium distortion of curve signals, through liquidity-sensitive NFCI components, and through credit spreads. It's a reminder that no single indicator reads policy stance in isolation — the panel diversifies across channels.