Quantitative easing
Quantitative easing is a central bank's purchase of financial assets to inject money and ease conditions when rates are already low.
When interest rates hit zero and the economy still needs help, central banks reach for a stranger tool: creating money to buy financial assets. That is quantitative easing.
Quantitative easing is a central bank's large-scale purchase of financial assets, usually government bonds, using newly created money, in order to inject liquidity and ease financial conditions when conventional interest-rate cuts have reached their limit. It is the main unconventional tool of modern monetary policy.
Why central banks resort to it
The standard way to stimulate a weak economy is to cut interest rates, but rates cannot fall much below zero. When they are already at the floor and the economy still needs support, the central bank turns to quantitative easing: by buying bonds in bulk, it pushes up their prices and pushes down longer-term interest rates, beyond the short-term rate it directly sets, and floods the financial system with cash, aiming to encourage lending, spending, and investment.
How it is meant to work
Several channels are supposed to carry the effect. Lower long-term rates make borrowing cheaper across the economy. Higher asset prices make holders wealthier and may encourage spending. And by buying safe assets, the central bank pushes investors toward riskier ones, loosening financial conditions more broadly. The newly created money is electronic, not printed notes, and the central bank intends, eventually, to reverse the purchases.
The controversies
Quantitative easing is contested. Critics worry it inflates asset prices and so widens inequality, benefiting those who own assets, that it distorts markets and encourages excessive risk-taking, and that the money created could eventually fuel inflation. Defenders argue it averted far worse outcomes in crises when no conventional tools remained. Its long-run effects, and the difficulty of unwinding it without disruption, remain debated.
Quantitative easing moved from emergency improvisation to a standard part of the central banking toolkit within a generation. Whatever its costs, it represents an admission that when the ordinary machinery of interest rates is exhausted, central banks will reach further, creating money to act directly on the financial system, with consequences economists are still working out.