Quantitative Easing (QE)
Quantitative easing is large-scale buying of government bonds and other assets by a central bank, paid for with newly created central bank reserves. It is used to push down longer-term interest rates when short-term rates are already close to zero.
Also called: QE · large-scale asset purchases · LSAP · asset purchase programme
When the policy rate cannot usefully fall further, a central bank can still lower long-term rates by buying long-dated bonds. It pays by crediting the sellers' banks with reserves, so the money does not come from taxes or government borrowing. Lower long yields, achieved partly by compressing the term premium, feed through to mortgages, corporate borrowing and asset prices.
The Federal Reserve announced purchases of up to US$600 billion of agency debt and mortgage-backed securities in November 2008, cut its federal funds target range to zero to 0.25 percent in December, and added longer-term Treasuries in March 2009. The Bank of England began QE in March 2009 and bought £895 billion in total, £875 billion of it UK government bonds. It decided in February 2022 to begin reversing the process, known as quantitative tightening.
QE changes the shape of the yield curve and the make-up of bank balance sheets, which end up holding large reserve balances at the central bank. Critics argue it inflated asset prices and blurred the line with monetary financing of governments; defenders note that purchases are made in secondary markets and can be reversed. For payment firms the visible effect was years of near-zero interest on client balances, followed by rate rises that made safeguarded funds and stablecoin reserves earn again.
In practice
QE does not print banknotes or directly fund government spending, but where it sits relative to monetary financing depends on legal limits and on whether the purchases are expected to be reversed.
Example
A central bank buys £10 billion of 10-year gilts from pension funds. The funds' banks receive £10 billion of new reserves, the funds hold deposits instead of bonds, and the 10-year yield falls as the central bank absorbs supply.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Quantitative Easing, with more detail and background.
Read “Quantitative Easing (QE)” on Money Wiki (opens in a new tab)
Commonly confused with
| Term | How it differs |
|---|---|
| Yield curve control | QE fixes a quantity of purchases and lets yields move. Yield curve control fixes a target yield and buys whatever quantity is needed to hold it. |
See also
- Yield Curve ControlYield curve control is a central bank policy of targeting the yield on government bonds of a chosen maturity and buying whatever quantity is needed to hold it there. It caps borrowing costs further out along the yield curve.
- Term PremiumThe term premium is the extra yield investors demand for holding a long-term bond rather than rolling over a series of short-term ones for the same period. It cannot be observed directly and has to be estimated with models.
- Yield CurveThe yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
- Monetary FinancingMonetary financing is a central bank funding government spending directly, by lending to the state or buying its debt when issued, with newly created money. Many legal systems prohibit it because of its link to high inflation.
- Central Bank MoneyCentral bank money is money that is a direct liability of the central bank: banknotes and coins, and the balances that commercial banks hold in their accounts at the central bank. It carries no credit risk and is the safest settlement asset.