CandleFocus

Quantitative Easing

Quantitative easing (QE) is an unconventional monetary policy tool used by central banks to stimulate economic activity. It is most often used when conventional monetary policy, such as lowering interest rates, is no longer effective. The Federal Reserve has employed this policy several times since 2008.

Quantitative easing is an expansionary monetary policy by which a central bank increases the total money supply in an economy by buying securities from a banking system. It is typically used to increase the money supply when interest rates have already been lowered to near zero, thus being unable to provide further stimulus to the economy.

When a central bank implements QE, it purchases financial assets and government bonds from banks and other financial institutions by entering the market with large amounts of money. This process provides liquidity to the system and increases the total money supply. The goal of the central bank is to lower long-term interest rates and stimulate economic activity.

The Federal Reserve has employed quantitative easing several times since 2008 to stimulate the U.S. economy. In 2008 and 2009, the Fed launched a series of large-scale asset purchase programs, known as “quantitative easing” (QE). The first two rounds, dubbed QE1 and QE2, involved the purchase of $1.7 trillion in securities, including government bonds and mortgage-backed securities.

In 2011 and 2012, the Federal Reserve launched a third round of quantitative easing, dubbed QE3, focusing primarily on the purchase of long-term government bonds with the aim of further stimulating economic activity. The Fed also announced that it would reinvest the proceeds of its mortgage-backed securities, purchased under QEs 1 and 2, into U.S. Treasury securities in order to maintain the size of the balance sheet and oversee the flow of funds in the economy.

Since 2013, the Federal Reserve has been tapering its quantitative easing program, which marked the end of the post-crisis fiscal and monetary policy stimulus. The total balance sheet stands at about $4 trillion and is primarily composed of government debt, some mortgage-backed securities, and a smaller amount of other securities.

Quantitative easing has been an effective tool for central banks to provide stimulus to economies during periods of weak economic activity. However, there are also some risks associated with this policy, such as asset bubbles and an increase in inflation. The potential benefits and costs of quantitative easing should be weighed carefully before and after it is implemented.

Glossary Index