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What is quantitative easing (QE)?

Quantitative easing (QE) is a form of Monetary Policy in which a central bank, such as the US Federal Reserve, buys securities from open market to reduce interest rates and increase the money supply.

Quantitative easing creates new bank reserves, providing banks with more liquidity and encouraging loans and investments. In the United States, the Federal Reserve is implementing QE policies.

Key points to remember

  • Quantitative easing is a form of monetary policy used by central banks to increase the domestic money supply and stimulate economic activity.
  • Under QE, the central bank buys government bonds and other financial instruments, such as mortgage-backed securities (MBS).
  • Quantitative easing is typically implemented when interest rates are close to zero and economic growth has stalled.
  • In the United States, the Federal Reserve is implementing quantitative easing policies.

Click play to learn how quantitative easing works

Understanding Quantitative Easing (QE)

Quantitative easing is often implemented when interest rates are close to zero and economic growth has stalled. Central banks have limited tools, such as lowering interest rates, to influence economic growth. Without the ability to lower rates further, central banks must strategically increase the money supply.

To execute quantitative easing, central banks to buy government bonds and other securities, injecting bank reserves into the economy. The increase in the money supply decreases interest rate further and provides liquidity to the banking system, allowing banks to lend on easier terms.

During the COVID-19 pandemic, quantitative easing was used and the Federal Reserve increased its holdings, accounting for 56% of Treasury securities issuance in the first quarter of 2021.

A government tax policy can be implemented simultaneously to increase the money supply. While the Federal Reserve can influence the supply of money in the economy, the US Treasury Department can create new money and implement new fiscal policies with fiscal policy, by sending money, directly or indirectly, in the economy. Quantitative easing can be a combination of monetary and fiscal policy.

Does quantitative easing (QE) work?

Most economists believe that the Federal Reserve’s quantitative easing program helped rescue the US and global economy after the Financial crisis of 2007-2008however, the results of EQ are difficult to quantify.

Globally, central banks have tried to deploy quantitative easing as a way to prevent recession and deflation in their countries with equally inconclusive results. While the QE policy is effective in lowering interest rates and boosting the stock market, its broader impact on the economy is not apparent.

Generally, the effects of quantitative easing benefit borrowers relative to savers and investors relative to non-investors, and there are pros and cons to QE, according to Stephen Williamson, a former economist at the Federal Reserve Bank of St. Louis.

Quantitative easing (QE) risks


As money increases in an economy, the risk of inflation looms. As liquidity flows through the system, central banks remain vigilant, as the lag between the increase in money supply and the rate of inflation is typically 12 to 18 months.

A quantitative easing strategy that does not stimulate the desired economic growth but causes inflation can also create stagflationa scenario where the inflation rate and the unemployment rate are high.

Limited loan

As liquidity increases for banks, a central bank like the Fed cannot force banks to increase their lending activity or force individuals and businesses to borrow and invest. This creates a “credit crunchwhere cash is held in banks or corporations hoard cash due to an uncertain business climate.

Devalued currency

Quantitative easing can devalue the national currency as the money supply increases. While a devalued currency can help domestic manufacturers with cheaper exported goods on the world market, a fall in the value of the currency makes imports more expensive, raising the cost of production and consumer price levels.

Concrete examples of quantitative easing (QE)

United States

To fight the Great Recessionthe US Federal Reserve conducted a quantitative easing program from 2009 to 2014. The Federal Reserve balance sheet increased with bonds, mortgages and other assets. U.S. bank reserves reached over $4 trillion in 2017, providing liquidity to lend those reserves and drive overall economic growth. However, banks held $2.7 trillion in excess reserves, an unexpected result of the Federal Reserve’s QE program.

In 2020, the Fed announced plans to purchase $700 billion in assets as part of an emergency quantitative easing measure following the economic and stock market turmoil caused by the COVID-19 shutdown. However, in 2022 the Federal Reserve drastically changed its monetary policy to include significant interest rate hikes and a reduction in Fed holdings to deflect the persistent trend of higher inflation that emerged in 2021.

Europe and Asia

Following the 1997 Asian financial crisisJapan has fallen into an economic crisis recession. The Bank of Japan launched an aggressive quantitative easing program to curb deflation and stimulate the economy, shifting from buying Japanese government bonds to buying private debt and equities. The quantitative easing campaign failed to achieve its goals as Japan’s gross domestic product (GDP) fell from around $5.45 trillion to $4.52 trillion.

The Swiss National Bank (SNB) also used a quantitative easing strategy following the 2008 financial crisis and the assets held by the SNB exceeded the annual economic output for the whole country. Although economic growth has been boosted, it is unclear how much of the subsequent recovery can be attributed to the SNB’s quantitative easing program.

In August 2016, the bank of england (BoE) has launched a quantitative easing program to help deal with the potential economic ramifications of Brexit. By buying £60bn of government bonds and £10bn of corporate debt, the plan aimed to keep interest rates from rising and boost business investment and jobs.

In June 2018, the UK Office for National Statistics reported that capital formation was growing at an average quarterly rate of 0.4%, lower than the average rate from 2009 to 2018. UK economists were unable to determine whether or not growth would have been evident without this quantitative easing program.

How does quantitative easing work?

Quantitative easing is a type of monetary policy in which a country’s central bank tries to increase the liquidity of its financial system, usually by buying long-term government bonds from that country’s largest banks and stimulating economic growth by encouraging banks to lend or invest more freely.

Is quantitative easing printing money?

Critics have argued that quantitative easing is actually a form of money printing and cite examples in history where money printing has led to hyperinflation. However, proponents of quantitative easing argue that banks act as intermediaries rather than putting cash directly into the hands of individuals and businesses, so quantitative easing carries less risk of producing inflation. galloping.

How does quantitative easing increase bank lending?

QE replaces banking system obligations with cash, which effectively increases the money supply and makes it easier for banks to free up capital, so they can take out more loans and buy other assets. A bank can lend any deposit above its 10% reserve.

The essential

Quantitative easing is a form of monetary policy in which a central bank, such as the US Federal Reserve, purchases securities through open market operations to increase the money supply and encourage bank lending and investment. QE policies have been implemented globally, however, their impact on a country’s economy is often debated.

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