Quantitative Easing

Quantitative easing (QE) is a monetary policy tool in which a central bank purchases large quantities of financial assets — typically government bonds and mortgage-backed securities — to inject liquidity into the economy when conventional interest rate cuts have reached their effective lower bound. It is monetary policy by balance sheet expansion rather than by price signal: instead of making money cheaper, the central bank makes it more abundant. The Federal Reserve deployed QE in 2008, 2010, 2012, and 2020, each time expanding its holdings to unprecedented levels. The mechanism is theoretically straightforward — increase the monetary base, lower long-term yields, stimulate investment — but the effects are nonlinear, path-dependent, and poorly understood. QE may prevent deflationary collapse, but it also distorts asset prices, inflates asset bubbles, and creates a dependency that is politically easier to continue than to reverse. The exit is the hard part.