What Is Quantitative Easing (QE) — When Rates Don't Work, Inject Money Directly
What does a central bank do when the economy fails to revive even after cutting rates to 0? The card the Fed played in 2008 was exactly "quantitative easing (QE)."
What Is Quantitative Easing?
Quantitative easing (QE) is a policy in which a central bank buys large amounts of assets such as government bonds and mortgage-backed securities (MBS) to inject money directly into the market.
When the policy rate has already been lowered to near 0 with no room to cut further, it is an unconventional tool that adjusts the "quantity (liquidity)" instead of the "price (rate)." When the central bank buys bonds, long-term rates fall, and it induces the money released into the market to flow into lending and spending.
The History of the Fed's QE — From $1 Trillion to $9 Trillion
The Fed's balance sheet (assets held) grew dramatically through QE.
QE1 (2008-2010): purchases of about $1.75 trillion in MBS, agency bonds, and Treasuries in response to the financial crisis.
QE2 (2010-2011): about $600 billion in Treasury purchases.
QE3 (2012-2014): a method of buying a set amount each month with no cap.
Through this process, the Fed's assets grew from under $1 trillion in early 2008 to over $4 trillion in 2014, and with the 2020 COVID response added on top (from $4.2 trillion in March, about $3 trillion in additional purchases), reached a peak of about $8.9 trillion (about $9 trillion) in 2022.
Detailed figures differ slightly by source (e.g., the size of QE1 purchases, the timing of the peak). The numbers in this article show approximate magnitudes; for precise figures, it is best to rely on the Fed's official materials.
The Light and Shadow of QE
QE is credited with preventing financial markets from freezing during a crisis and with propping up the economy. But there is also a big debate over its side effects.
Representative criticisms are that the large-scale liquidity released pushed up asset prices in stocks, real estate, and so on, widening the wealth gap, and the concern that when this money is later withdrawn (quantitative tightening), the market can be shaken.
The important point is that QE is not "free money" but a policy that must someday be reversed. That is why the QE phase and the QT (quantitative tightening) phase must always be understood as a set.
よくある質問
Q. Does doing quantitative easing mean "printing" money?
It is different from physically printing banknotes. The central bank electronically creates reserves and uses them to buy bonds. As a result, market liquidity increases, so it is described as "releasing money," but whether that money immediately leads to inflation depends on the situation.
Q. Does QE always cause inflation?
Not necessarily. Even with large-scale QE after 2008, U.S. prices stayed low for a long time. If the money released does not circulate into lending and spending but stays in bank reserves, it may not lead to inflation. Conversely, when several factors combine, as in 2020-2021, prices can rise sharply.
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