Quantitative Easing, or “QE,” is an unconventional monetary policy used by central banks. It is an expansionary monetary policy that falls within the tools of the FOMC and OMO. Ultimately, central banks buy financial assets from banks, an action that increases the monetary base and decreases interest rates. This policy is also referred to as “stimulus,” since the lowered interest rates encourage consumers to borrow and buy goods, thereby stimulating the economy. Currently, the FOMC has decided that the Federal Reserve banks will buy $45 billion in Treasurys and $40 billion in Mortgage Backed Securities (MBS) per month, for a total of $85 billion. This is the largest stimulus the U.S. has ever implemented.
The target rates for QE are 6.5% unemployment and 2.5% inflation. When either of these targets is hit, it is expected that the Federal Reserve will end QE. Federal Reserve economists predict that these target rates will be hit in 2015. These targets are not binding, however, and the Federal Reserve could end QE before or after 2015, whether or not the target rates are met.
Fed Balance Sheet
Quantitative easing has resulted in the expansion of Federal Reserve’s balance sheet from $1 trillion to over $4 trillion since late 2008.
Effect on Interest Rates
Quantitative easing influences interest rates lower than they may have been otherwise.