How Quantitative Easing Stimulates the Economy

Federal Reserve Chairman Jerome Powell (Yuri Gripas/Reuters)
The Fed is entering this recession with no conventional tools at its disposal.

NRPLUS MEMBER ARTICLE T he Fed announced its fourth round of quantitative easing (QE) on Sunday. In addition to cutting the benchmark interest rate to zero, the Fed will purchase $700 billion worth of Treasuries and mortgage-backed securities with two aims: 1) boosting liquidity in the financial system; 2) increasing aggregate demand by expanding the money supply.

Central banks have intermittently purchased assets from financial institutions since roughly 1990, when the Swedish and Finnish central banks undertook quantitative easing in response to the Nordic banking crisis. In 2000, the Bank of Japan was the first major-economy central bank to conduct asset purchases. The Federal Reserve


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