Definition
Quantitative easing, often shortened to QE, is a monetary policy in which a central bank creates new reserves and uses them to buy financial assets, typically long-term government bonds. The aim is to lower long-term interest rates and increase the money supply when the usual tool, the short-term policy rate, is already near zero.
It is described as unconventional because it goes beyond setting a short-term rate, targeting longer maturities and the quantity of money directly.
Why it matters
How it works
The central bank credits new reserves to commercial banks in exchange for bonds. With more reserves and fewer bonds in private hands, bond prices rise and their yields fall. Lower long-term rates make loans cheaper and push investors toward riskier, higher-return assets.
QE is meant to combat deflation and recession when conventional policy is exhausted. Unwinding it, sometimes called quantitative tightening, means selling assets back or letting them mature, which can be disruptive if done too quickly.