Quantitative easing

Quantitative easing, often shortened to QE, is when a central bank creates new reserves to buy government bonds and other securities in large quantities, pushing down longer-term interest rates and adding liquidity to the financial system well beyond what its routine open market operations provide.

Central banks turn to quantitative easing when the federal funds rate is already close to zero and cannot be cut much further to stimulate a weak economy, giving policymakers another lever to pull. By buying up large amounts of bonds, the central bank pushes bond prices up and their yields down, encouraging investors and savers to move money into riskier assets like stocks in search of better returns.

Periods of active quantitative easing have historically coincided with rising asset prices, since the flood of newly created liquidity has to go somewhere, and much of it ends up bidding up stocks, real estate, and other assets rather than just sitting in bonds paying almost nothing.