Quantitative Easing (QE)
A central bank's large-scale asset purchases that inject liquidity into the system and push down long-term interest rates.
Quantitative Easing (QE) is an unconventional monetary policy tool used when cutting short-term rates to zero is insufficient. The central bank creates new money to buy government bonds (and sometimes other assets like mortgage-backed securities), expanding its balance sheet and injecting liquidity into the financial system.
QE suppresses long-term yields, flattens the yield curve, devalues the currency, and pushes investors into riskier assets in search of return — a dynamic known as the "portfolio balance channel." QE programs from the Fed, ECB, and BoJ have been credited (and blamed) for the long bull market in risk assets post-2009.
Example
When the Fed launched "QE Infinity" in March 2020, its balance sheet expanded from $4T to nearly $9T by mid-2022. The S&P 500 more than doubled from its pandemic lows as cheap liquidity flooded the system.
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.
BeginnerCentral Bank
A national institution that manages monetary policy, controls money supply, and acts as a lender of last resort to the banking system.
BeginnerDeflation
A sustained fall in the general price level — the opposite of inflation — that can signal a collapsing demand environment.
IntermediateFederal Reserve
The U.S. central bank — its rate decisions and forward guidance move global markets more than any other single institution.
BeginnerMonetary Policy
Central bank actions — rate changes, asset purchases, reserve requirements — designed to control inflation and support employment.
BeginnerMoney Supply
The total stock of money in circulation — tracked via M1, M2, and M3 aggregates — a key input to inflation and liquidity analysis.
IntermediateQuantitative Tightening (QT)
A central bank's deliberate shrinkage of its balance sheet by allowing bonds to mature without reinvestment, draining liquidity from the system.
AdvancedTapering
The gradual reduction in the pace of a central bank's asset purchases — a step toward tightening that precedes rate hikes and signals the end of QE.
IntermediateTreasury
U.S. government debt securities issued by the Department of the Treasury — the global benchmark for risk-free rates and the deepest bond market in the world.
Beginner