Quantitative easing

Quantitative easing (QE), also known as large-scale asset purchases, is a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy. An unconventional form of monetary policy, it is usually used when inflation is very low or negative, and standard expansionary monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value. Expansionary monetary policy to stimulate the economy typically involves the central bank buying short-term government bonds to lower short-term market interest rates. However, when short-term interest rates reach or approach zero, this method can no longer work. In such circumstances, monetary authorities may then use quantitative easing to further stimulate the economy, by buying specified quantities of financial assets without reference to interest rates, and by buying riskier or longer maturity assets (other than short-term government bonds), thereby lowering interest rates further out on the yield curve. Quantitative easing can help bring the economy out of recession and help ensure that inflation does not fall below the central bank's inflation target. Risks include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term), or not being effective enough if banks remain reluctant to lend and potential borrowers are unwilling to borrow. According to the International Monetary Fund, the US Federal Reserve System, and various other economists, quantitative easing undertaken following the global financial crisis of 2007–08 has mitigated some of the economic problems since the crisis. Standard central bank monetary policies are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate. However, if a recession or depression continues even when a central bank has lowered interest rates to nearly zero, the central bank can no longer lower interest rates — a situation known as the liquidity trap. The central bank may then implement quantitative easing by buying financial assets without reference to interest rates. This policy is sometimes described as a last resort to stimulate the economy. A central bank enacts quantitative easing by purchasing, regardless of interest rates, a predetermined quantity of bonds or other financial assets on financial markets from private financial institutions. This action increases the excess reserves that banks hold. The goal of this policy is to ease financial conditions, increase market liquidity, and facilitate an expansion of private bank lending.