Federal Reserve quantitative easing
Quantitative easing (QE)
is an extra measure that the Fed can apply in times of severe financial crisis. It is usually only used once the above policy tools have been exhausted – the federal funds rate is near zero, and economic growth is still faltering. What does the Fed do next?
In function, QE looks fairly similar to open market operations. The FOMC buys securities on the open market, injecting money directly into the system. However, there are two key differences between the two:
- Different assets are bought. Instead of focusing on short-term bonds, the FOMC will usually buy longer term securities, to reduce rates over the long term as well as the short term
- The aim is different. While open market operations are intended to lower the federal funds rate, QE purchases aim to massively increase money supply by adding to the Fed’s reserves
After the 2008 recession, the Fed undertook a series of QE programmes, pouring trillions of dollars into the US economy. However, it’s unclear how much QE helped the US economy recover.