Quantitative Easing

Key Highlights

• Quantitative easing is a monetary policy tool used by central banks to stimulate the economy when conventional methods, such as lowering short-term interest rates, are no longer effective.

What is Quantitative Easing (QE)?

Quantitative easing is a monetary policy tool used by central banks to stimulate the economy when conventional methods, such as lowering short-term interest rates, are no longer effective. Central banks achieve this by purchasing predetermined amounts of government bonds or other financial assets, thereby increasing the money supply, lowering interest rates, and encouraging lending and investment.

How Quantitative Easing Works?

• Asset Purchases: The central bank snaps up long-term government bonds or other financial stuff from the market. This floods banks with cash, lowers long-term interest rates, and nudges them to lend more.

• Impact on Financial Markets: QE can make stocks and bonds pricier, which makes investors feel richer and more confident. This “wealth effect” can spark more spending and optimism.

• Setting Expectations: Central banks often pair QE with promises to keep interest rates low for a while. This encourages everyone to borrow and spend, knowing cheap loans are here to stay.

• Risks and Criticisms: QE isn’t perfect. It might overheat markets, creating bubbles or fueling inflation later. It can also widen the gap between rich and poor, since those with investments benefit most. Plus, if banks or borrowers are too cautious, QE’s boost might fizzle out.