Quantitative Easing

Quantitative easing (QE) is a monetary policy in which a central bank buys large quantities of longer-term securities, such as government bonds and agency mortgage-backed securities, to put downward pressure on longer-term interest rates.

How quantitative easing works

The Federal Reserve calls its version of QE large-scale asset purchases. On its open market operations page the Fed states that from the end of 2008 through October 2014 it greatly expanded its holdings of longer-term securities, with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation. The purchases came in rounds: $1.25 trillion of agency mortgage-backed securities and $175 billion of agency debt between late 2008 and 2010, $300 billion of longer-term Treasuries in 2009, a further $600 billion from November 2010 to June 2011, and from late 2012 an open-ended $40 billion of MBS and $45 billion of Treasuries per month until purchases ended in October 2014. The Fed pays by creating bank reserves, expanding its balance sheet as a result.

On March 23, 2020 the FOMC replaced fixed commitments with purchases "in the amounts needed." See quantitative tightening for the reverse.

What QE means for investors

QE targets the part of the yield curve a policy-rate cut cannot reach directly. When the central bank bids for long-dated bonds, their prices rise and their yields fall, which lowers mortgage rates, corporate borrowing costs and the discount rates applied to future earnings. Lower yields on safe assets also push some investors toward corporate credit and equities in search of return. The size of the Fed's balance sheet therefore becomes a signal that markets track alongside the policy rate. QE does not lend directly to households or guarantee asset prices, and the Fed's own description ties its purpose to financial conditions and employment rather than to any market level. Investors following liquidity and capital flows watch announcements of new purchases or tapering because they change the supply of safe assets.

Hypothetical example: a bond with a duration of 8 years sees its yield fall 0.50% as purchases begin, so its price would rise about 4%. See the bond duration calculator.