GlossaryFed & inflation
Quantitative easing
Large-scale purchases of Treasury and mortgage securities by the Federal Reserve to push down long-term interest rates, used after the 2008 financial crisis and again in 2020.
When cutting rates is not enough
The Federal Reserve normally steers the economy by setting short-term interest rates. In the 2008 financial crisis it cut them to almost zero and still needed to do more. It turned to quantitative easing: buying large quantities of longer-term Treasury securities and mortgage-backed securities to push down long-term interest rates directly.
The Fed pays for these purchases by creating bank reserves, the electronic money that banks hold at the central bank. Its balance sheet grows by the amount it buys.
The rounds
The Fed ran several rounds of quantitative easing between 2008 and 2014. In 2020, as the pandemic hit, it bought Treasury securities faster than ever before, and its holdings of government debt reached several trillion dollars. From 2022 it reversed course with quantitative tightening, letting securities mature without replacing them.
How it affects the debt
Securities held by the Fed still count as debt held by the public, and the Treasury pays interest on them. But the Fed normally sends its profits to the Treasury after covering its costs, so for years much of that interest effectively came back to the government.
That changed when interest rates rose. The Fed pays interest on the reserves it created, and once those rates exceeded the yield on its older bond holdings it began running losses. It stopped sending money to the Treasury and records the shortfall as a deferred asset, to be recovered from future profits before payments resume.
Is it printing money to fund the government?
This is the central controversy. The Fed buys in the open market, not directly from the Treasury, and says its purchases serve monetary policy, not government financing. Critics argue the effect resembles debt monetization, because large central bank purchases made record deficits easier and cheaper to finance. Whether QE blurs that line depends in part on whether it is reversed, and on whether the central bank would act differently if government finances were under strain.