Quantitative Easing is an unconventional monetary policy where a central bank purchases large quantities of government bonds and other securities (such as mortgage-backed securities) to inject money into the financial system, lower long-term interest rates, and stimulate economic activity when conventional rate cuts have reached the zero lower bound.
How QE Works
The Fed creates new reserves electronically and uses them to buy bonds from banks and financial institutions. This: (1) pushes up bond prices and pushes down yields, (2) forces investors into riskier assets (stocks, corporate bonds) β the 'portfolio rebalance effect,' and (3) increases bank reserves, theoretically encouraging more lending.
U.S. QE History
Impact
QE is widely credited with preventing deeper recessions and supporting asset price recovery. Critics argue it inflates asset bubbles, increases wealth inequality (the top 10% own ~90% of stocks), and creates 'moral hazard' by backstopping markets.
Global Context
The Bank of Japan pioneered QE in 2001. The ECB launched its QE in 2015. Japan's balance sheet reached ~130% of GDP, compared to the Fed's peak of ~37%.