What are Quantitative Easing and Quantitative Tightening?

Question

I’ve been hearing these terms but don’t really understand what they mean, when and why are they used by the government and how exactly they affect prices and general standard of living.

In: 45

Answer 1

This is why you ask questions on r/AskEconomics instead of subs like this. You get simple answers here, but they’re only about 75% right.

To increase economic activity and fight a recession, the Fed usually lowers interest rates (lower interest rates mean it’s cheaper to borrow money that you can then spend, increasing economic activity). The 2008 financial crisis was so bad that the Fed lowered its rate [all the way to zero for the first time](https://fred.stlouisfed.org/series/FEDFUNDS). You technically can go lower than zero by having a [negative interest rate](https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/why-negative-interest-rate.en.html), but the Fed didn’t do that. Instead, it used quantitative easing (QE).

In ELI5 terms, QE is the Fed buying assets like bonds to push interest rates down more. Buying bonds increases their price, which lowers their yield (interest rate). Quantitative tightening (QT) is the opposite. The Fed isn’t buying new bonds and is letting the ones it owns mature, decreasing bond prices and raising yields.

Like I said, lowering rates (and by extension QE) is meant to increase economic activity. Raising rates (and by extension QT) is trying to do the opposite: slow down economic activity to combat inflation.

A few misconceptions from the other comments that need correcting. QE isn’t about “increasing stock prices.” That is a side effect, QE is about increasing borrowing. And the Federal Reserve’s Board of Governors **is** “[an agency of the federal government that reports to and is directly accountable to Congress](https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf#page=10),” they’re appointed by the President, etc. The individual Reserve Banks themselves (e.g. the Atlanta Fed) aren’t part of the government, but they’re overseen by the Board of Governors (which, again, is a federal agency).