Notes

Quantitative easing (QE), also known as large-scale asset purchases,[1][2] is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and increase liquidity.[3][4] An unconventional form of monetary policy,[3] it is usually used when standard monetary policy has become ineffective at combating inflation or deflation that falls below policy targets.[5][6][7][8] A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply.[9][10] This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.[11][12][13][14]
Expansionary monetary policy to stimulate the economy typically involves the central bank buying short-term government bonds to lower short-term market interest rates.[15][16][17][18] However, when short-term interest rates reach or approach zero, this method can no longer work.[19] In such circumstances, monetary authorities may then use quantitative easing to further stimulate the economy, by buying assets that are riskier, or of longer maturity, than short-term government bonds, thereby lowering interest rates further out on the yield curve.[20][21]
Quantitative easing can help ensure that inflation does not fall below a target.[14] Risks include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term, due to increased money supply),[22] or not being effective enough if banks remain reluctant to lend and potential borrowers are unwilling to borrow.[23] According to the International Monetary Fund, the U.S. Federal Reserve System, and various economists, quantitative easing undertaken since the global financial crisis of 2007–08 has mitigated some of the economic problems since the crisis

US QE1, QE2, and QE3 [edit]

Federal Reserve Holdings of Treasury Notes (blue) and Mortgage-Backed Securities (red)
The U.S. Federal Reserve System held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late November 2008, the Federal Reserve started buying $600 billion in mortgage-backed securities.[47] By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes; this amount reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June, holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at $2.054 trillion. To maintain that level, the Fed bought $30 billion in two- to ten-year Treasury notes every month.[48]
In November 2010, the Fed announced a second round of quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[49][50] The expression "QE2" became a ubiquitous nickname in 2010, used to refer to this second round of quantitative easing by US central banks.[51] Retrospectively, the round of quantitative easing preceding QE2 was called "QE1".[52][53]
A third round of quantitative easing, "QE3", was announced on 13 September 2012. In an 11–1 vote, the Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. Additionally, the Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near zero "at least through 2015."[54][55] According to NASDAQ.com, this is effectively a stimulus program that allows the Federal Reserve to relieve $40 billion per month of commercial housing market debt risk.[56] Because of its open-ended nature, QE3 has earned the popular nickname of "QE-Infinity."[57] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.[58]
On 19 June 2013, Ben Bernanke announced a "tapering" of some of the Fed's QE policies contingent upon continued positive economic data. Specifically, he said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting.[59][not in citation given] He also suggested that the bond-buying program could wrap up by mid-2014.[60] While Bernanke did not announce an interest rate hike, he suggested that if inflation followed a 2% target rate and unemployment decreased to 6.5%, the Fed would likely start raising rates. The stock markets dropped by approximately 4.3% over the three trading days following Bernanke's announcement, with the Dow Jones dropping 659 points between 19 and 24 June, closing at 14,660 at the end of the day on 24 June.[61] On 18 September 2013, the Fed decided to hold off on scaling back its bond-buying program,[62] and announced in December 2013 that it would begin to taper its purchases in January 2014.[63] Purchases were halted on 29 October 2014[64] after accumulating $4.5 trillion in assets.[