What Quantitative Easing Is

Quantitative easing is a monetary policy in which a central bank creates new money to buy large quantities of government bonds and other financial assets. It is used to push down longer-term interest rates and support the economy when short-term rates have already been cut to near zero and cannot fall much further.

Often shortened to QE, the tool moved from obscure jargon to front-page news after the 2008 global financial crisis, when several major central banks adopted it on a vast scale, and again during the economic shock of 2020.

Why do central banks turn to QE?

A central bank’s usual way of supporting a weak economy is to lower its main short-term interest rate. Cheaper borrowing encourages households and businesses to spend and invest. But interest rates cannot fall far below zero, so once they are already very low, this conventional tool runs out of room. Economists call this the lower bound.

Quantitative easing is one response to that limit. Instead of adjusting a short-term rate, the central bank acts directly in financial markets to bring down longer-term interest rates, which influence mortgages, corporate borrowing, and other loans. In this sense QE is often described as an unconventional or additional form of monetary stimulus.

How does quantitative easing work?

Under QE, the central bank creates new money electronically and uses it to buy financial assets, most commonly government bonds, from banks and other investors. It does not print physical banknotes; instead it credits the sellers with new reserves held at the central bank. This has several linked effects.

Buying large amounts of bonds pushes up their prices and, because prices and yields move in opposite directions, pushes down their yields, or interest rates. Lower yields on safe government bonds tend to drag down borrowing costs across the economy. The investors who sold the bonds now hold cash, which they may use to buy other assets or lend out, supporting spending and investment. The process also increases the amount of money and reserves in the financial system.

Economists describe these linked effects as the transmission mechanism of QE. By lowering the return on safe assets, the policy encourages investors to shift toward riskier assets such as corporate bonds and shares, a process sometimes called the portfolio-balance channel. It can also signal that the central bank intends to keep policy loose for some time, which influences expectations. Cheaper and more available credit is meant to feed through to more borrowing, spending, and investment across the economy.

How does QE compare with other policy tools?

QE is one of several tools a central bank can reach for once conventional rate cuts are exhausted. Another is forward guidance, where the central bank communicates its likely future path for interest rates to shape expectations. Some central banks have also experimented with negative interest rates or targeted lending programs that offer cheap funding to banks on condition they lend it on. These tools are often used together, and QE is frequently paired with forward guidance so that asset purchases and communication reinforce one another.

What happens to the central bank’s balance sheet?

Every asset the central bank buys stays on its books, so QE expands the size of its balance sheet, sometimes dramatically. The assets are the bonds it has purchased; the corresponding liabilities are the new reserves it has created. The table below contrasts QE with its reversal.

Feature	Quantitative easing (QE)	Quantitative tightening (QT)
Action	Central bank buys assets	Central bank reduces assets held
Money supply	Increases	Decreases
Balance sheet	Expands	Shrinks
Effect on long-term rates	Downward pressure	Upward pressure
Typical timing	Downturns and crises	Recoveries, unwinding stimulus

When has QE been used?

The most prominent examples came after the 2007 to 2009 financial crisis, when central banks including the U.S. Federal Reserve, the Bank of England, and later the European Central Bank launched large asset-purchase programs to support their economies. Balance sheets expanded enormously as a result. A second major wave came in 2020, when central banks again bought assets on a large scale to steady markets and cushion the economic impact of the pandemic.

The scale of these programs was historically unusual. Central bank balance sheets, which had held relatively modest amounts of assets before 2008, grew to many times their earlier size as purchases mounted. Bonds bought under QE were mostly government debt, but some programs also included mortgage-backed securities or, in a few cases, corporate bonds, depending on each central bank’s mandate and the problems it was trying to address. Studies of these episodes generally find that QE helped lower long-term interest rates, though economists continue to debate exactly how large and lasting the effects were.

Does QE cause inflation?

Because QE increases the money supply, a common concern is that it will fuel inflation. In part, raising inflation toward target is the goal when inflation is too low. Whether it leads to high inflation depends on how much of the new money is actually lent and spent in the wider economy. After 2008, several years of large-scale QE were not followed by the surge in inflation some had predicted, in part because banks held much of the new reserves rather than lending them out. The full effects of QE remain actively debated among economists.

What are the criticisms and how is QE reversed?

Critics point out that by raising the prices of assets such as bonds, shares, and property, QE can benefit those who already own such assets more than those who do not, potentially widening wealth gaps. Others worry about the risks of central banks holding very large portfolios or about distorting market signals. Supporters counter that QE helped avert deeper recessions and supported employment, and that the alternative of doing nothing once rates hit their lower bound could have been far more costly. There are also questions about how central banks eventually exit such large positions and about the losses they can incur on their holdings if interest rates rise. These debates mean that, while QE is now an established part of the monetary toolkit, its use in any given situation is rarely uncontroversial.

When conditions improve, a central bank can unwind QE through quantitative tightening, either selling assets or, more commonly, allowing bonds to mature without replacing them. This gradually shrinks the balance sheet and withdraws money from the system, the mirror image of the easing that came before. Because unwinding can itself affect interest rates and markets, central banks usually signal their plans well in advance and proceed slowly, aiming to normalize policy without disrupting the recovery they set out to support. Understanding this full cycle, from large-scale asset purchases to their eventual unwinding, is key to making sense of how modern central banks respond to deep economic shocks.

Sources

• Bank of England — What is quantitative easing?
• Federal Reserve Bank of St. Louis — Quantitative Easing: How Well Does This Tool Work?
• European Central Bank — What is the asset purchase programme?
• Congressional Budget Office — How the Federal Reserve's Quantitative Easing Affects the Federal Budget

Related from Business & Economy