Quantitative Easing
A Fed policy of purchasing Treasury bonds and MBS to inject liquidity, lower long-term yields, and stimulate the economy when short rates are near zero.
Quantitative Easing (QE) is an unconventional monetary policy tool used when the fed funds rate cannot go lower (zero lower bound). The Fed creates bank reserves electronically and uses them to purchase long-duration assets — primarily Treasuries and mortgage-backed securities — directly from banks and dealers.
QE achieves two goals: (1) it injects reserves into the banking system, increasing liquidity; (2) it suppresses long-term yields by increasing demand for duration. Lower long yields reduce borrowing costs for mortgages, corporate bonds, and consumer credit.
A side effect of QE is a powerful boost to risk assets. By suppressing the risk-free rate, QE pushes investors out the risk curve into equities, high-yield bonds, and real assets. The four rounds of Fed QE (QE1–QE4) were major tailwinds for equity bull markets.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerDiscount Rate
The interest rate the Federal Reserve charges commercial banks for direct short-term borrowing from the Fed's discount window.
IntermediateDovish
A monetary policy stance favouring lower interest rates and easier financial conditions to support growth and employment — the opposite of hawkish.
IntermediateFederal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediateFOMC
The Federal Open Market Committee — the Fed body that sets U.S. monetary policy, meeting eight times per year to vote on the federal funds rate target.
IntermediateMortgage-Backed Security (MBS)
A bond backed by a pool of home mortgages, passing borrower payments through to investors — and a key target of Fed QE.
AdvancedQuantitative Tightening
The Fed's policy of shrinking its balance sheet by allowing bonds to mature without reinvesting the proceeds — the reverse of QE.
AdvancedReal Yield
A bond's nominal yield minus expected inflation — the true inflation-adjusted return a bondholder earns for lending money.
AdvancedReverse Repo
The Fed's tool for absorbing excess reserves from money markets — the counterparty sells Treasuries to the Fed overnight, draining liquidity from the system.
Advanced