Quantitative Easing

What Is Quantitative Easing?

Quantitative easing, or QE, is an unconventional monetary policy in which the Federal Reserve buys large quantities of government bonds and other securities to inject money into the financial system and push down longer-term interest rates, such as mortgage rates. It is generally deployed when the federal funds rate has already been cut to near zero, leaving conventional rate cuts largely exhausted. As the Fed buys and holds these assets, its balance sheet grows. During its 2008-2014 programs the Fed primarily purchased U.S. Treasury securities and agency mortgage-backed securities. In AP Macroeconomics terms, QE is classified as an unconventional expansionary monetary policy tool.

Why It Matters

The Fed launched its first QE program (QE1) in 2008 during the financial crisis, followed by later rounds; the open-ended, labor-market-tied 2012 program (QE3) was nicknamed "QE infinity." QE aims to lower borrowing costs and support markets when the traditional interest-rate lever has hit its limit. Japan's central bank, the Bank of Japan, pioneered large-scale QE in the early 2000s, years before the Fed. In March 2020 the Fed characterized its pandemic-era purchases as open-ended, buying "in the amounts needed" to support market function, which helped swell its balance sheet to roughly $9 trillion at its peak before purchases formally ended in March 2022.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What does "QE" stand for?
  Quantitative easing
• What does quantitative easing generally involve the Fed doing?
  Buying large quantities of government bonds and other securities
• In what year did the Fed launch its first quantitative easing program (QE1)?
  2008