Quantitative Easing

Quantitative easing (QE) is a monetary policy in which a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity.

One of the byproducts if not goal of QE is to help drive down the value of a currency, thereby making one’s exports, equities, and other products more affordable on a global stage.

QE is considered an unconventional form of monetary policy and is usually used when inflation is very low or negative or when standard expansionary monetary policy has become ineffective.

A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions.

This in turn raises the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply.

This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.

Examples of QE in the Real World

The two most common examples of QE in recent years include Japan and the United States.

Even before the Great Financial Crisis, the US Federal Reserve had held between $700-800 billion of Treasury Notes.

Starting in late 2008, the Federal Reserve began buying upwards of $600 billion in mortgage-backed securities, eventually increasing its stake to $1.75 trillion in treasury notes and securities.

This eventually increased to a peak of $2.1 trillion by 2010. Purchases were eventually halted and slowed as the US economy rebounded and improved.

QE was again adopted in 2010 to help kindle the recovery of the economy.

QE policy was reversed starting in 2013 by then Fed Chairman Ben Bernanke, who advocated a ‘tapering’ policy, which led to the scaling back of bond purchases from $85 billion to $65 billion a month.

More recently, in September 2019, the Federal Reserve also embarked on another QE operation, purchasing approximately $700 billion in via asset purchases to support US liquidity in response to the outbreak of COVID-19.

The results of QE have proven to be controversial. While seen as a driver of income equality, QE generally has led to the decreased value of the US Dollar, by virtue of an increased money supply.

Here's how quantitative easing works:

The central bank buys government bonds or other financial assets from banks, increasing the banks' reserve balances.

This increase in reserves makes it easier for banks to lend money, as they now have more funds available.

The increased lending helps to lower interest rates and stimulate borrowing and spending, which can boost economic growth.

The central bank can also influence the yield on government bonds by purchasing large amounts of them, which can help to lower long-term interest rates and boost investment.

The central bank can sell the bonds back into the market at a later date, which can help to tighten monetary policy and reduce inflationary pressures.