Quantitative easing
(QE), explained
Quantitative easing (QE) is a non-traditional monetary
policy tool used by central banks, particularly when interest rates
are already low and cannot be reduced further.
It was popularized during the
2008 global financial crisis when traditional monetary tools,
like lowering interest rates, were insufficient to stimulate
economic growth.
The main goal of QE is to boost the economy by increasing the
money supply. This is achieved by encouraging banks to lend more
and making borrowing cheaper for consumers and businesses. When
central banks implement QE, they purchase
government bonds or other securities from the market, injecting
cash into the financial system.
Even though people sometimes say QE is like “printing money,”
it’s not the same as making new physical cash. Instead, it
increases the amount of digital money — meaning the balances held
in bank accounts — in the economy. This isn’t cryptocurrency; it’s
regular money created by the central bank and used by banks to lend
more, which helps boost spending and investment.
QE can also raise the prices of assets like stocks and bonds
because the extra money looking for returns drives demand higher.
Governments also used QE during the COVID-19 pandemic to help keep
the economy stable and support growth.
How does quantitative
easing work?
To understand how QE functions behind the scenes, it’s
important to look at the step-by-step mechanics that drive this
policy.
QE doesn’t work through a single action — it operates through a
chain of events that begins with the central bank and eventually
influences everyday economic activity. Here’s how the process
typically unfolds:
- Asset purchases: Central banks buy government
securities, such as treasury bonds, from banks and financial
institutions.
- Increasing money supply: These purchases flood
the
financial system with liquidity.
- Lowering interest rates: With more cash on
hand, banks lower interest rates, making loans cheaper.
Boosting lending and spending: Cheaper loans mean more business
investments and consumer spending, which are key drivers of
economic growth.
Quantitative easing in
practice: Historical examples
Quantitative easing isn’t just a theory — it’s been used by
major central banks during times of economic
trouble.
Here are some real-world examples of how it worked:
United States (2008–2014; 2020): The global financial
crisis
After the 2008 housing market crash, the US economy was in a
deep recession. To help:
- The Federal Reserve launched three rounds of QE (QE1, QE2,
QE3).
- It bought trillions of dollars in government bonds and
mortgage-backed securities.
- This helped lower interest rates, supported lending, and
boosted the stock market.
When COVID-19 shut down economies worldwide, the US Fed acted
quickly:
- It reintroduced QE, buying $120 billion per month in bonds at
its peak.
- It aimed to keep borrowing costs low and support businesses and
households.
Japan (2001–2006, and again from 2013 onward): Fighting
deflation
Japan was dealing with low inflation and sluggish growth for
years. The Bank of Japan (BoJ):
- Started using QE before most other countries.
- Bought large amounts of government bonds and later included
stocks and real estate investment trusts.
Eurozone (2015–2022): Post-debt crisis recovery
The European Central Bank (ECB) introduced QE after a debt
crisis hit Greece, Italy and Spain:
- The ECB bought government bonds from eurozone countries to
bring down borrowing costs.
- This supported weaker economies and aimed to prevent deflation
(falling prices).
How quantitative easing
impacts crypto markets
Quantitative easing doesn’t just affect traditional financial
markets — it also impacts the cryptocurrency market.
When central banks inject more cash into the economy, some of
that money flows into alternative assets like Bitcoin (BTC)
and
altcoins, driving up their prices. This surge in liquidity
often boosts asset prices across the board, including
cryptocurrencies, as more money becomes available for
investments.
Additionally, during QE,
fiat currencies may lose value due to increased money supply,
leading some investors to seek out cryptocurrencies as a
hedge against inflation or currency devaluation. Bitcoin, in
particular, is often seen as a store of value similar to
gold.
For example, in 2020, during the COVID-19 pandemic, the US
Federal Reserve launched aggressive QE. At the same time:
- Bitcoin was trading under $5,000 in March 2020.
- By late 2021, it had soared past $60,000.
Key factors behind Bitcoin’s growth during QE include rising
inflation fears and low interest rates pushing investors toward
alternative assets. Among these, a major driver could be the search
for a store of value outside traditional finance. Thus, QE can
indirectly contribute to crypto market booms by influencing
investor sentiment and liquidity.
The flip side: When QE ends, crypto may suffer
When central banks end QE or start raising interest rates
(tightening policy), liquidity is reduced, and borrowing becomes
more expensive. This can lead to pullbacks in risk assets,
including crypto.
For example, in 2022, the Fed began quantitative tightening to
combat inflation. Bitcoin dropped from around $47,000 in March to
below $17,000 by December — a decline likely driven by investors
shifting to safer assets and reduced risk appetite due to rising
interest rates.
Quantitative easing (QE)
vs. quantitative tightening (QT): Key differences
Quantitative easing (QE) and quantitative tightening (QT)
are two opposing monetary policies used by central
banks.
QE involves expanding the money supply by purchasing assets such
as government bonds, which
injects cash into the economy to stimulate growth. Its main
purpose is to lower interest rates and encourage lending when the
economy is struggling.
QT is the process of contracting the central bank’s balance
sheet. It involves selling assets or letting them mature, reducing
the money supply. The goal of QT is to cool down an overheating
economy and prevent inflation from rising too quickly.
The key difference between QE and QT lies in their impact on the
central bank’s balance sheet: QE expands it, whereas QT contracts
it. In terms of market effects, QE tends to drive asset prices up,
whereas QT can lead to lower asset prices and higher interest
rates. Both policies significantly influence inflation and market
stability.
Are the Fed tapering and quantitative easing the same?
No, tapering and QE are not the same — but they are
connected.
- Quantitative easing is when the Federal Reserve actively buys
assets, such as government bonds, to inject money into the economy
and lower interest rates.
- Tapering is when the Fed slows down those asset purchases —
it’s the beginning of the end of QE, not a reversal.
Is the Fed still
tightening or easing in 2025?
As of April 2025, the US Federal Reserve is navigating a
complex economic landscape characterized by persistent inflationary
pressures and slowing economic growth.
In response, the Fed has maintained its benchmark interest rate
within the 4.25%–4.50% range, signaling a cautious approach to
monetary policy adjustments.
While the Fed has not fully transitioned to an easing stance, it
has begun to moderate its QT efforts. Specifically, starting in
April, the Fed reduced its monthly runoff of Treasury securities
from $25 billion to $5 billion while continuing to allow $35
billion in mortgage-backed securities to mature without
reinvestment.
Looking ahead, the Federal Open Market Committee (FOMC) projects
the possibility of two interest rate cuts later in 2025, contingent
upon economic conditions. This projection reflects the Fed’s
attempt to balance the dual mandates of controlling inflation and
supporting employment amid uncertainties, including the impact of
recent tariff policies.
Pros and cons of
quantitative easing
Quantitative easing boosts growth and lowers borrowing
costs, but overuse can fuel inflation, asset bubbles and long-term
policy challenges.
Pros
- QE helps boost economic activity by increasing the money supply
and encouraging lending and investment.
- By purchasing government bonds, QE drives down interest rates,
making borrowing cheaper for businesses and consumers.
- By injecting liquidity into the economy, QE helps boost demand
and supports price stability, preventing deflation.
Cons
- An excessive increase in the money supply can devalue the
currency and push inflation higher.
- Easy money can drive up asset prices, leading to overvalued
stocks, bonds or real estate.
- QE adds to national debt, making it harder for central banks to
manage inflation or interest rates in the future.
In the end, quantitative easing remains a powerful but
double-edged tool: capable of stabilizing economies in crisis yet
carrying long-term risks that must be carefully managed to avoid
repeating past imbalances.
