Quantitative easing is when the Fed (or another country’s central bank) buys up large amounts of bonds.
It’s one type of monetary policy tool the Fed can use to try to help the economy when it needs a boost.
Quantitative easing works by lowering interest rates on long-term bonds. Here’s how:
Step 1: The Fed starts buying lots of bonds (think hundreds of billions of dollars) in the bond market.
Step 2: This creates lots of new demand, which pushes bond prices up.
Step 3: Bond prices and interest rates always move in opposite directions. So as bond prices rise, interest rates fall.
With lower interest rates, it’s cheaper for businesses and consumers to take out loans and make investments. More borrowing and investing can help the economy start to regain its momentum and turn around from a slowdown.
Central banks may turn to quantitative easing as a second-resort option.
Usually, their first resort is to lower short-term interest rates. In the U.S., the Fed does this by reducing the:
However, those two interest rates only apply to very short-term loans (like loans made for one day), and lowering those rates doesn’t do much to affect the interest rates that you might pay on a mortgage or that a business might pay on a loan.
Quantitative easing can let the Fed reduce interest rates throughout the economy, which can have a bigger impact on restarting economic growth.
In theory, central banks can buy any type of bond when they engage in quantitative easing. In practice, they typically buy:
Like any type of economic intervention, quantitative easing can be controversial and comes with risks. Those can include:
But all in all, the consensus is that quantitative easing programs (like the types many central banks used in the aftermath of the 2008-09 financial crisis) have been successful in turning struggling economies around.
Quantitative easing is when the Fed (or another central bank) buys up lots of bonds. It’s one tool central banks can use to help restart a slowing economy. Quantitative easing works by lowering interest rates on long-term loans, which can make it cheaper for businesses and consumers to borrow and invest.