Quantitative Easing (QE)

What Is Quantitative Easing?

Quantitative easing is an unconventional monetary policy tool used by a central bank when short-term interest rates are already near zero and further cuts are no longer effective. Instead of changing its benchmark rate, the central bank creates new reserves and uses them to purchase large quantities of assets, most often government bonds and sometimes mortgage-backed securities. The goal is to push down longer-term interest rates, increase the money supply, and encourage borrowing and investment.

How It Works

When a central bank buys a bond, it pays the seller with newly created money held as bank reserves. This has several effects. Because the central bank is a large and steady buyer, bond prices rise and their yields fall. Investors who sell their bonds receive cash, which they may reinvest in other assets such as corporate bonds or stocks. Lower long-term rates also reduce borrowing costs for mortgages, business loans, and other credit, which can support spending and economic activity.

Why It Matters to Investors

Quantitative easing can affect nearly every asset class. Lower yields on safe bonds may push investors toward riskier assets in search of higher returns, a dynamic often described as a "search for yield." Stock and corporate bond markets have sometimes risen during these programs, though the link is not always direct. Currency values can also move, since lower interest rates relative to other countries may weaken a currency.

Risks and Criticisms

Critics point out several drawbacks. Large asset purchases expand the central bank's balance sheet, and unwinding them later, a process called quantitative tightening, can cause market volatility. Some economists worry that prolonged low rates inflate asset prices faster than consumer prices, and that the policy can benefit owners of financial assets more than other households. Its effect on inflation and growth is also debated, and results differ by country and period.