[ Quantitative Easing ]
Quantitative easing (QE) is a form of monetary policy in which a central bank, like the U.S. Federal
Reserve, purchases securities in the open market to reduce interest rates and increase the money
supply.
Quantitative easing creates new bank reserves, providing banks with more liquidity and encouraging
lending and investment. In the United States, the Federal Reserve implements QE policies.
Quantitative easing is a form of monetary policy used by central banks to increase the domestic
money supply and spur economic activity.
With QE, the central bank purchases government bonds and other financial instruments, such as
mortgage-backed securities (MBS).
Quantitative easing is typically implemented when interest rates are near zero and economic growth
is stalled.
In the U.S., the Federal Reserve implements quantitative easing policies.
Quantitative easing is often implemented when interest rates hover near zero and economic growth is
stalled. Central banks have limited tools, like interest rate reduction, to influence economic growth.
Without the ability to lower rates further, central banks must strategically increase the supply of
money. To execute quantitative easing, central banks buy government bonds and other securities,
injecting bank reserves into the economy. Increasing the supply of money provides liquidity to the
banking system and lowers interest rates further. This allows banks to lend with easier terms. A
government’s fiscal policy may be implemented concurrently to expand the money supply. While the
Federal Reserve can influence the supply of money in the economy, the U.S. Treasury Department
can create new money and implement new tax policies with fiscal policy. This sends money, directly
or indirectly, into the economy. Quantitative easing can involve a combination of both monetary and
fiscal policies.
Most economists believe that the Federal Reserve’s quantitative easing program helped to rescue the
U.S. and the global economy following the 2007–2008 financial crisis; however, the results of QE are
difficult to quantify. Globally, central banks have attempted to deploy quantitative easing as a means
of preventing recession and deflation in their countries with similarly inconclusive results. While QE
policy is effective at lowering interest rates and boosting the stock market, its broader impact on the
economy isn’t apparent. Commonly, the effects of quantitative easing benefit borrowers over savers
and investors over non-investors, so there are pros and cons to QE.
Risks of quantitative easing include inflation, limited lending and devalued currency.
Inflation: As money is added to an economy, the risk of inflation looms. While the liquidity works its
way through the system, central banks remain vigilant, as the time lag between the increase in the
money supply and the inflation rate is generally 12 to 18 months. Federal Reserve Bank of St. Louis.
“Examining Long and Variable Lags in Monetary Policy.” A quantitative easing strategy that does not
spur intended economic growth but causes inflation can also create stagflation, a scenario where
both the inflation rate and the unemployment rate are high.
Limited Lending: Even though liquidity increases for banks, a central bank like the Fed cannot force
banks to increase lending activities, nor can it force individuals and businesses to borrow and invest.
This creates a credit crunch, where cash is held at banks or corporations hoard cash due to an
uncertain business climate.
Devalued Currency: Quantitative easing may devalue the domestic currency as the money supply
increases. While a devalued currency can help domestic manufacturers because the goods they
export become cheaper in the global market, a falling currency value makes imports more expensive,
increasing the cost of production and consumer price levels.
Quantitative easing is a type of monetary policy by which a nation’s central bank tries to increase the
liquidity in its financial system, typically by purchasing long-term government bonds from that nation’s
largest banks and stimulating economic growth by encouraging banks to lend or invest more freely.
Critics have argued that quantitative easing is effectively a form of money printing and point to
examples in history where money printing has led to hyperinflation. However, proponents of
quantitative easing claim that banks act as intermediaries rather than placing cash directly in the
hands of individuals and businesses so quantitative easing carries less risk of producing runaway
inflation.
How Does Quantitative Easing Increase Bank Lending? QE replaces bonds in the banking system
with cash, effectively increasing the money supply, and making it easier for banks to free up capital.
As a result, they can underwrite more loans and buy other assets.
