Quantitative Easing (QE) is a monetary policy used by central banks to stimulate the economy when standard monetary policy becomes ineffective. A central bank implements QE by buying financial assets, like government bonds and other securities, from commercial banks and other financial institutions.Â
It’s a powerful signal that the Fed wants to stimulate economic growth, and that is an influential force on capital markets and asset prices.
Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis
In Simpler Terms
Let’s view the economy as a garden that needs water to grow. In normal conditions, rain (standard monetary policy) provides enough water for the garden to flourish. But sometimes, the rain isn’t enough, and the garden starts to dry out. Quantitative Easing (QE) is like a central bank’s emergency irrigation system. When the regular rain isn’t doing the job, the central bank turns on the QE sprinklers, pumping extra water (money) into the garden (economy) to keep it from drying out.
This process increases the money supply, lowers interest rates, and boosts lending and investment. By injecting money into the economy, QE aims to encourage economic growth, increase inflation to a target level, and reduce unemployment. It’s typically used during periods of very low inflation or deflation, an economic recession, or when interest rates are already near zero and cannot be lowered further.
