Quantitative easing (QE) is an unconventional monetary policy tool used by central banks when conventional interest rate policy has reached its limits — typically when rates are already near zero and further cuts are not possible or effective. QE involves the central bank purchasing large quantities of financial assets (primarily government bonds, but sometimes corporate bonds and other securities) from commercial banks, with the aim of stimulating the economy.
The mechanics: when the Fed (or Bank of England, or European Central Bank) purchases a government bond from a commercial bank, it credits the bank's reserve account with newly created money. This expands the central bank's balance sheet (the bond appears as an asset; the newly created reserves are a liability) and increases the stock of reserves in the banking system.
The transmission mechanisms are multiple and debated. QE reduces long-term interest rates by increasing demand for bonds, pushing up bond prices and reducing yields. This lowers borrowing costs for governments, companies, and households. By reducing yields on safe assets (government bonds), QE encourages investors to take more risk, pushing up prices of corporate bonds, equities, and other risk assets — the "portfolio rebalancing" channel. Higher asset prices increase household wealth, supporting spending.
A signalling channel is also important: QE signals that rates will remain low for a prolonged period, anchoring low rate expectations and keeping long-term borrowing costs down.
QE was first deployed extensively by the Bank of Japan in the early 2000s. The Fed conducted multiple QE programmes after 2008. The Bank of England launched QE in 2009. The ECB began large-scale asset purchases in 2015.
Critics argue QE disproportionately benefits asset owners (pushing up property and stock prices), contributes to inequality, and creates financial stability risks when unwound. Proponents argue it prevented severe deflation and depression following 2008 and 2020. The evidence on its effectiveness is genuine but contested, with most studies finding significant but not unlimited impact on growth and inflation.