Sign UpWhat Is Quantitative Easing(QE) and Quantitative Tightening(QT)?
Beginner
2024-09-27
Quantitative Easing (QE)
When interest rates are low and conventional measures are less successful, central banks use the monetary policy tool known as QE to boost the economy. The central bank initiates QE by acquiring financial assets from business banks, financial institutions and, occasionally, the open market. Government bonds are the most commonly bought assets, but central banks can also purchase corporate bonds or mortgage-backed securities.
The central bank issues new currency to cover the cost of these purchases. As a result, the economy has more money available. The freshly produced money is given to the asset sellers, which are often banks, in exchange for the assets they sell to the central bank.
The central bank raises demand for assets by purchasing significant amounts of them, particularly government bonds. As a result, these assets become more expensive, and, in turn, their yields or interest rates decline. Lower long-term interest rates stimulate spending and borrowing, as well as stock and real estate investments in riskier assets.
The United States Federal Reserve implemented quantitative easing to amplify the money supply and invigorate economic expansion, addressing the repercussions of extreme events like the COVID-19 pandemic’s impact.
One of the key concerns with QE is its potential impact on inflation. A considerable infusion of cash into the economy could result in price increases if the growth of products and services is outpaced by the expansion of the money supply. However, this risk depends on a number of variables, including the overall health of the economy, consumer and business trends, and the central bank’s capacity to successfully control the money supply.
Quantitative Tightening (QT)
The opposite of QE, known as QT, involves central banks selling assets to reduce the money supply and possibly raise interest rates. QT may result in less liquidity in financial markets, which may impact the crypto market
Some key differences between QE and QT are stated in the table below:
|
|
QE
|
QT
|
|
Purpose
|
Boost economic activity
|
Cool down economic activity
|
|
Action
|
The central bank buys assets
|
The central bank sells assets
|
|
Interest rate
|
Lower interest rate
|
Increase interest rate
|
|
Economic impact
|
Boost spending and investment
|
Curb inflation and asset bubble
|
It’s important to note that the effects of policies such as QE and QT are not fixed and they can fluctuate depending on specific economic circumstances and the timing of their action.
Share
