What is quantitative easing

What is Quantitative Easing

Quantitative easing is by creating money and then buying bonds or other financial assets from banks. Higher loan growth, in turn, should make it easier to finance projects. The Fed’s purchases help drive up the prices of bonds by reducing their supply, which causes their yields to fall. Lower yields, in turn, provide the fuel for economic expansion by lowering borrowers’ costs.

In 2008 financial crisis, slow growth and high unemployment forced the Fed to stimulate the economy through its policy of quantitative easing in the interval from November 25, 2008 through March 2010. The program had little impact initially, so the Fed announced an expansion of the program from $600 billion to $1.25 trillion on March 18, 2009. Immediately after the program wrapped up, trouble emerged in the form of slower growth, the rise of the European debt crisis, and renewed instability in the financial markets.

The Fed moved in with a second round of quantitative easing, which became known as “QE2” and involved the purchase of $600 billion worth of short-term bonds. This program - which Chairman Ben Bernanke first hinted at on August 27, 2010 - ran from November 2010 through June 2011. QE2 sparked a rally in the financial markets but did little to spur sustainable economic growth.

On September 13, 2012, the U.S. Federal Reserve launched its third round of quantitative easing. It would keep short-term rates low through 2015. These moves reflect the Fed's view that the economy still hasn't reached the point of self-sustaining growth. The Fed has adopted what has been called "QE Infinity," a plan to purchase $85 billion of fixed-income securities per month, $40 billion of mortgage-backed securities and $45 billion of U.S. Treasuries