Glossary
Quantitative easing (QE)
A central bank buying large amounts of bonds with newly created reserves to push down longer-term interest rates and ease credit.
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Quantitative easing (QE) is a policy in which a central bank buys large quantities of financial assets, mainly government bonds and, in the US, mortgage-backed securities, paying for them with newly created bank reserves. Central banks turn to it when they have already cut short-term rates close to zero and want to add more support. By soaking up longer-dated bonds, QE pushes down long-term interest rates, lifts asset prices and loosens financial conditions.
How it works
When the Federal Reserve buys a Treasury bond from a dealer, it credits the seller's bank with reserves, money held at the Fed. The bond moves onto the Fed's balance sheet and the private sector holds more cash and fewer long-term bonds. Several channels then work:
- Lower yields. Heavy buying raises bond prices, which lowers their yields, including mortgage rates.
- Portfolio rebalancing. Investors who sold bonds move into other assets, such as corporate bonds and stocks, pushing those prices up.
- Signaling. A large, ongoing program tells markets the central bank expects to keep rates low for a long time.
Debates and side effects
QE is credited with steadying markets in 2008–2009 and March 2020, but its effects on growth and inflation remain disputed. Critics argue it inflates asset prices, which benefits people who already own stocks and homes, and that it can make governments less careful about borrowing. Reversing it is slow and uncertain; that process is Quantitative tightening (QT). The Bank of Japan used an early version in the early 2000s, and the European Central Bank and Bank of England ran large programs of their own.