Quantitative easing

From MarketsWiki
Jump to: navigation, search
FTSE Russell banner 2016.gif

Quantitative easing (QE) is a government monetary policy central banks occasionally use to increase the supply of money in an economy when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The central bank does this by purchasing financial assets such as government bonds and corporate bonds from banks with money it has created ex nihilo (out of nothing). This increase in the supply of money is intended to stimulate the economy by promoting increased lending and liquidity.[1]

The US Federal Reserve first used quantitative easing in 2008 [2] during the US financial crisis, spending more than $1.5 trillion buying bonds with money it created on its own account. The Bank of England did the same in 2009, spending £200bn on UK government bonds.[3]

The Fed and the Bank of England came to the rescue when banks were refusing to lend to each other. The effect of QE was to increase demand for bonds, which in turn lowered the yield. A lower yield brings down long-term interest rates and makes borrowing money cheaper.

The Federal Reserve launched the second round of quantitative easing, dubbed "QE2" in November of 2010.

References

  1. Quantitative Easing Definition. Investopedia.
  2. Quantitative Easing, Explained. NPR.
  3. Quantitative easing explained. The Guardian.