quantitative easing
/ QE /
A central bank's usual tool is the short-term interest rate. But what happens when that rate is already at zero and the economy still needs more help? The bank cannot cut much below zero. So central banks reached for a different tool: instead of lowering the price of money, they pump in a large quantity of money by buying huge amounts of longer-term assets — government bonds and sometimes other securities — with newly created money. This is quantitative easing, or QE: 'easing' policy by acting on the quantity of money when the interest-rate lever is stuck.
Here is roughly how it is meant to work. The central bank creates new reserves and uses them to buy, say, long-term government bonds from investors. This raises the bonds' prices and pushes down their yields, which are the long-term interest rates the bank cannot reach directly with its short-term rate. Lower long-term rates make mortgages and corporate borrowing cheaper, and they push investors toward riskier assets like stocks and corporate bonds (the 'portfolio rebalancing' effect), loosening financial conditions broadly. QE also signals that the bank intends to keep policy loose for a long time. Note what QE is not: the central bank buys existing bonds in the market: it does not hand cash to citizens or directly fund new government spending.
QE was used massively after the 2008 crisis and again during the 2020 pandemic, swelling central bank balance sheets to trillions. Economists generally think it helped lower long-term rates and supported the economy, but its effects are debated and hard to measure cleanly. Critics warn it can inflate asset prices (helping the wealthy who own those assets), distort markets, and be hard to unwind. 'Quantitative tightening' is the reverse — letting the bonds mature or selling them to shrink the balance sheet. A persistent myth is that QE is simply 'printing money that causes inflation'; in the 2010s it generally did not, because the new reserves mostly sat in banks rather than chasing goods.
After 2008, the Fed bought trillions of dollars of Treasury and mortgage bonds, swelling its balance sheet from under 1 trillion to over 4 trillion dollars, pushing down long-term rates when its policy rate was already pinned near zero.
When the rate hits zero, QE works on the quantity of money instead.
QE is not the same as 'helicopter money' or printing cash for the public: the bank swaps new reserves for existing bonds with investors. Whether it stokes inflation depends on whether that money is actually lent and spent.