Quantitative easing

Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity.

Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.

However, in contrast to normal policy, quantitative easing usually involves the purchase of riskier or longer-term assets (rather than short-term government bonds) of predetermined amounts at a large scale, over a pre-committed period of time.

[9] Standard central bank monetary policies are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate.

This would have the effect of increasing the asset prices of the bonds purchased, thereby lowering yields and dampening longer term interest rates and making it cheaper for businesses to raise capital.

On 28 September 2022 the Bank of England issued a Market Notice announcing its intention to "carry out purchases of long dated gilts in a temporary and targeted way".

[73] This was in response to market conditions in which the sterling exchange rate and bond asset pricing were significantly disrupted following a UK government fiscal statement.

The Bank also announced that its annual £80bn target to reduce the existing QE portfolio remained unchanged but, in the light of current market conditions, the beginning of gilt sale operations would be postponed to 31 October 2022.

[83] The SNB's balance sheet has increased massively due to its QE programme, to the extent that in December 2020, the US treasury accused Switzerland of being a "currency manipulator".

The BOJ came up with a policy to purchase index ETFs as part of the 2010 Comprehensive Monetary Easing program, which initially placed a cap of ¥450 billion shares with a termination in December 2011.

However, later Governor Haruhiko Kuroda replaced the program with the Quantitative and Qualitative Monetary Easing policy which empowered the BOJ to buy ETFs with no cap or termination date, with an increased annual target of ¥1 trillion.

A different assessment has been offered by Federal Reserve Governor Jeremy Stein, who has said that measures of quantitative easing such as large-scale asset purchases "have played a significant role in supporting economic activity".

In the Eurozone, studies have shown that QE successfully averted deflationary spirals in 2013–2014, and prevented the widening of bond yield spreads between member states.

[citation needed] During times of high economic output, the central bank always has the option of restoring reserves to higher levels through raising interest rates or other means, effectively reversing the easing steps taken.

The European Parliament has also joined the criticism by adopting several resolutions on the matter, and has repeatedly called on the ECB to reflect climate change considerations in its policies.

[125] Following this criticism, in 2020, several top level ECB policymaker such as Christine Lagarde,[126] Isabel Schnabel, Frank Elderson[127] and others have pointed out the contradiction in the market neutrality logic.

For instance, British Prime Minister Theresa May openly criticized QE in July 2016 for its regressive effects: "Monetary policy – in the form of super-low interest rates and quantitative easing – has helped those on the property ladder at the expense of those who can't afford to own their own home.

"[131] Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".

[132] Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy.

[132][134] In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans.

However, if the US treasury uses QE to a higher degree, as evidenced in the increased purchase of securities during an economic crisis, but India does not, then the value of the USD will decrease relative to the Indian rupee.

[146] According to Bloomberg reporter David Lynch, the new money from quantitative easing could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves, and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, warned in 2010 that QE carries "the risk of being perceived as embarking on the slippery slope of debt monetization.

[150][151] According to economist Robert McTeer, former president of the Federal Reserve Bank of Dallas, there is nothing wrong with printing money during a recession, and quantitative easing is different from traditional monetary policy "only in its magnitude and pre-announcement of amount and timing".

This liquidity was lent by banks to enterprises, stimulating their expansion and inflating sales, which led investors to anticipate growth in company revenues, leading to increased stock purchases.

[157] They argue that based on the evidence from tax rebates in the United States, less than 5% of GDP transferred by the ECB to the household sector in the Eurozone would suffice to generate a recovery, a fraction of what it intends to be done under standard QE.

[158] On 27 March 2015, 19 economists including Steve Keen, Ann Pettifor, Robert Skidelsky, and Guy Standing have signed a letter to the Financial Times calling on the European Central Bank to adopt a more direct approach to its quantitative easing plan announced earlier in February.

[159] In August 2019, prominent central bankers Stanley Fischer and Philip Hildebrand co-authored a paper published by BlackRock in which they propose a form of helicopter money.

Also, the central bank has the stated intention of reversing the QE when the economy has recovered (by selling the government bonds and other financial assets back into the market).

[172][173] Neo-Fisherism, based on theories made by Irving Fisher reasons that the solution to low inflation is not quantitative easing, but paradoxically to increase interest rates.