Quantitative Easing

Loading the player...

DEFINITION of 'Quantitative Easing'

An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

BREAKING DOWN 'Quantitative Easing'

Typically, central banks target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses.

For more information on the policy of quantitative easing, read Quantitative Easing: What's In A Name?

RELATED TERMS
  1. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
  2. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  3. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  4. Budget Deficit

    A status of financial health in which expenditures exceed revenue. ...
  5. Sterilized Intervention

    The purchase or sale of foreign currency by a central bank to ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
Related Articles
  1. Fundamental Analysis

    Is Brazil Currently in a Depression?

    Find out if Brazil, the world's seventh-largest economy, may have finally slipped into an economic depression, and learn the reasons why.
  2. Mutual Funds & ETFs

    4 ETF Strategies for Growth in Latin America for 2016

    Use these strategies to invest in Latin American ETFs in 2016. The region has several underperformers such as Brazil but it still offers growth.
  3. Mutual Funds & ETFs

    TLT: iShares Barclays 20+ Year Treasury Bond ETF

    Learn about the iShares 20+ Year Treasury Bond ETF (TLT). TLT is a very liquid ETF with low costs that allow investors to gain exposure to treasuries.
  4. Mutual Funds & ETFs

    BNDX: Vanguard Total International Bond ETF

    Learn about the Vanguard Total International Bond exchange-traded fund, which invests in investment-grade foreign, sovereign and corporate bonds.
  5. Economics

    3 Economic Challenges Germany Faces in 2016

    Learn about significant economic challenges that Germany will face in 2016. Read about how much it will cost the country to relocate Syrian refugees.
  6. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  7. Economics

    What are the Federal Reserve Chairman's responsibilities?

    Learn about the duties and responsibilities of the chairman of the Federal Reserve Board, including testifying before Congress and as chair of the FOMC.
  8. Economics

    3 Reasons Germany Would Be Better Off Without the Euro

    Explore the arguments in favor or against the idea that Germany would be better off leaving the European Union and abandoning the euro.
  9. Economics

    Understanding Janet Yellen's Role On Interest Rates

    Learn about Janet Yellen's role at the Federal Reserve. At first she was known as a dove, but Yellen has actually been quiet hawkish.
  10. Stock Analysis

    3 Stocks To Buy and Hold For the Rest of 2015 (PRU, MKTX)

    One of the dominant themes to consider for 2015 is the normalization of monetary policy as the Fed raises interest rates.
RELATED FAQS
  1. Who are some real life examples of "doves" in the finance world?

    Real-life examples of "doves" in the finance world include Janet Yellen, Paul Krugman, Ben Bernanke, Bill Dudley, Narayana ... Read Full Answer >>
  2. What is the opposite of a "dove"?

    A dove is an economic policy adviser who favors maintaining low interest rates in hopes of stimulating the economy, while ... Read Full Answer >>
  3. What risks does the dealer (lender) in a reverse repurchase agreement take on?

    In a conventional repurchase agreement, or repo, the dealer is the borrower and takes on similar risks to borrowers in other ... Read Full Answer >>
  4. What nations other than the U.S. have risk-free interest rates?

    Countries other than the United States that have risk-free interest rates are Canada, the European Union, Japan, the United ... Read Full Answer >>
  5. When the Federal Reserve Bank engaged in Quantitative Easing, did it add to M1?

    When quantitative easing takes place, the money supply is increased, but quantitative easing does not directly boost the ... Read Full Answer >>
  6. What is a deflationary spiral?

    A deflationary spiral occurs when a depressed economy leads to falling prices. Consumers stop spending and firms stop investing ... Read Full Answer >>
  7. What are the implications of a low Federal Funds Rate?

    The federal funds rate is the interest rate at which banks borrow reserves from one another. A low federal funds rate implies ... Read Full Answer >>
  8. Were collateralized debt obligations (CDO) responsible for the 2008 financial crisis?

    Though collateralized debt obligations (CDOs) played a leading role in the 2007-08 financial crisis, they were not the only ... Read Full Answer >>
  9. How does quantitative easing in the U.S. affect the stock market?

    The Federal Reserve's LSAP plan, or large scale asset purchases plan, also known as quantitative easing or QE, affects the ... Read Full Answer >>
  10. In what instances is quantitative easing used?

    The Federal Reserve and other central banks see quantitative easing as a last resort when short-term interest rates are at ... Read Full Answer >>
  11. How can quantitative easing be effective in the economy?

    It is incredibly difficult to determine whether any economic policy is effective. If the plan's policy prescriptions and ... Read Full Answer >>
  12. What impact does quantitative easing have on consumers in the U.S.?

    Quantitative easing is still a relatively new tool of monetary policy, and its impacts are not well-understood. Some of the ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center