Quantitative Easing

What Is It? 

Quantitative easing (QE) is a tool central banks use when cutting interest rates is not enough to stimulate the economy. In QE, the central bank buys large amounts of financial assets, usually government bonds. 

These purchases push bond prices up and yields down, lowering long-term borrowing costs and adding liquidity to the financial system. In practice, the central bank creates new money — called central bank reserves — to pay for the bonds. All this happens electronically. 

When the central bank reduces those purchases, it’s called tapering. And when it allows those bonds to mature or sells them without reinvesting the money, it’s known as quantitative tightening (QT).

Why Should I Care? 

Quantitative easing has shaped the global economy since the 2008 financial crisis. The Bank of Japan was to first to experiment with it in 2001 to fight deflation. The US Fed, European Central Bank, and the Bank of England all followed after the 2008 financial crisis.  

Today, QE has become a common tool during shocks and financial crises. Japan remains a pioneer, buying vast amounts of exchange-traded funds too. At one point the central bank held around 7% of the entire Japanese stock market via ETFs! 

Proponents say QE has helped prevent deeper recessions. But it has also artificially boosted asset prices — supporting stocks, housing, and other investments worldwide.

What’s the Catch? 

QE works through financial markets, not directly through wages or spending. That creates tradeoffs: 

• Asset prices rise faster than the real economy 
• Wealth inequality can widen, favoring asset owners 
• Central banks accumulate massive balance sheets 

As of August 2026, the Fed and the ECB both had total assets of nearly $7 trillion, multiple times over the pre-2008 levels. Shrinking those balance sheets without unsettling markets has proven difficult.