Quantitative easing: what it means

Large-scale purchases of Treasury and mortgage-backed securities, paid for with newly created reserves. That is money creation.

When the federal funds rate is already at or near zero, the committee cannot lower it further to loosen policy. Quantitative easing is the tool used instead: the Fed buys longer-dated securities in size, which bids up their price and pushes down their yield.

The purchases are paid for with newly created reserves, so the Fed’s balance sheet grows on both sides — securities on the asset side, reserves on the liability side. That is money creation. Coverage often walks it back: reserves are not currency; banks may park them. Both can be true in a given month. Neither undoes the decision to enlarge the stock. Whether those reserves sit parked or finance spending later, the central bank chose the size of the balance sheet.

The short rate is at the floor because earlier decisions put it there. QE is what comes next when the Committee wants still easier money. See what causes inflation and the side-by-side explainer.

Savers and anyone holding long bonds are paid less while yields are suppressed. Households on fixed incomes pay later if the extra money shows up in the price level.

A worked example

Suppose the Fed buys $80 billion of Treasury securities from banks in a month. It pays by crediting the banks’ reserve accounts. On the Fed’s balance sheet, assets rise by $80 billion (the bonds) and liabilities rise by $80 billion (the reserves). The buying raises the price of long-dated Treasuries, which lowers their yields — and the mortgage rates and corporate borrowing costs priced off them — without the federal funds rate moving at all. The dollar amount here is illustrative of the mechanism, not a claim about any one month.

The reserves are not handed out as banknotes. They are still newly created base money.

How to read it in coverage

“Printing money” is crude, and in one respect exact: the Fed pays by creating reserves. The measurable near-term effect is on long-term yields. The size of the balance sheet — on the balance sheet page with its stamp — is the running total of what QE bought and QT has since let go. “Just swapping assets” leaves out that the banking system now holds new reserves.