Quantitative Easing (QE)

When a central bank cuts its short-term policy rate as low as it can go but still wants to loosen financial conditions, it may turn to QE. The central bank electronically creates new reserves and uses them to buy assets — most often government bonds, but sometimes mortgage-backed securities or even corporate bonds — directly from the financial system. This expands the central bank's balance sheet (its total assets and liabilities), which is why QE is sometimes called "balance-sheet policy."

The mechanism works through supply and demand. By purchasing large quantities of bonds, the central bank pushes bond prices up — and since bond prices and yields move in opposite directions, yields fall. Lower long-term yields ripple through the economy: borrowing becomes cheaper for businesses and households, and investors may shift toward riskier assets seeking better returns — a dynamic economists call the portfolio balance effect.

Major central banks including the US Federal Reserve, the European Central Bank, and the Bank of Japan have all used QE at significant scale, notably after the 2008 financial crisis and again during the 2020 pandemic. The reverse process — the central bank shrinking its balance sheet by letting bonds mature without reinvestment or by selling assets outright — is called quantitative tightening (QT). Both QE and QT influence real yields, breakeven inflation rates, and currency values.

QE is distinct from simply printing physical cash; it operates through bank reserves in the financial system and does not automatically increase the money circulating in everyday transactions. Traders typically watch central-bank balance-sheet announcements and meeting minutes — available on the economic calendar — for signals about QE or QT intentions, as shifts in either direction historically move bond markets and currencies significantly.