# Quantitative Easing **Quantitative easing** is a central bank's large-scale purchase of longer-term assets, paid for by creating reserves, undertaken when the short-term policy rate is already at its effective lower bound and cannot be cut further. The Fed's own term is **large-scale asset purchases (LSAPs)**; "QE" is the colloquial and political label, and the difference between the two names is roughly the difference between how the policy was designed and how it was received. ## The mechanism Reserve creation is an accounting identity, not a choice. When the New York Fed's Desk buys a Treasury or agency mortgage-backed security, it pays by crediting the reserve account of the seller's bank: the security lands on the asset side, a new reserve balance on the liability side. Reserves cannot leave the banking system in aggregate — individual banks pass them among themselves, but only the Fed creates or extinguishes them. This is why "money printing" is simultaneously defensible and misleading. Base money does rise. Broad money and credit need not, and through the 2010s largely did not. Two transmission channels are standard, and separating them empirically is the central difficulty of the literature because both show up in the same observed yield: - **Portfolio balance.** Absorbing duration and prepayment risk out of private hands forces remaining holders to rebalance into other assets, compressing the [[Term Premium]]. Works through relative asset supplies; should work regardless of what the Fed signals about rates. - **Signaling.** Buying long-dated assets commits the Fed to keeping short rates low — partly because it would take capital losses on its own portfolio otherwise. Works through expectations of future short rates. A third, **market functioning**, was explicitly the dominant motive in March 2020. ## Origin: Bank of Japan, 19 March 2001 The BoJ originated QE as a named policy, changing its operating target from the overnight call rate to the outstanding balance of current accounts at the Bank — from a price target to a quantity target, which is the move that makes it *quantitative*. It set the target at around ¥5 trillion and committed to hold the framework until consumer prices registered zero or above year on year, an early instance of threshold-based forward guidance. The BoJ also bound itself with the **banknote rule**: JGB holdings could not exceed banknotes in circulation. The Fed never adopted any comparable self-imposed ceiling, which is part of why its balance sheet could grow to a far larger share of GDP. ## The Fed's programs | Program | Announced | Content | |---|---|---| | QE1 | 25 Nov 2008 | $100bn agency debt, up to $500bn agency MBS | | QE1 expanded | 18 Mar 2009 | $1.25tn agency MBS, $200bn agency debt, **$300bn Treasuries** | | QE2 | 3 Nov 2010 | $600bn Treasuries, ~$75bn/month, **Treasuries only** | | Operation Twist (MEP) | 21 Sep 2011 | Sell $400bn of ≤3-year paper, buy $400bn of 6–30-year | | QE3 | 13 Sep 2012 | Open-ended $40bn/month agency MBS; $45bn/month Treasuries added 12 Dec 2012 | | COVID | 15 Mar 2020 | ≥$500bn Treasuries, ≥$200bn agency MBS | | COVID, uncapped | 23 Mar 2020 | Purchases "in the amounts needed to support smooth market functioning" | Three of these deserve emphasis. **QE1 was a credit program**, roughly 80% mortgage-related, framed as repair of a broken housing-finance market rather than as stimulus. **QE2 was Treasuries only**, which is exactly why it drew the sharpest political fire: it looked like monetization of federal deficits. **Operation Twist was balance-sheet neutral by design** — it changed the duration of the Fed's holdings without changing reserves at all, which makes it the cleanest natural test of the portfolio-balance channel. If QE worked only by creating reserves, Twist should have done nothing. The **23 March 2020** commitment is the most aggressive in Fed history, and its stated rationale was market functioning, not stimulus: the Treasury market had seized in the "dash for cash." The Fed also added agency CMBS for the first time. **Peak balance sheet: $8.965 trillion on 13 April 2022** (H.4.1 of 14 April 2022), against roughly $870 billion before the 2008 crisis — a tenfold increase, and about 37% of GDP. ## Does it work? **The affirmative case,** summarized in Bernanke's 2020 AEA presidential lecture, holds that purchases compressed term premia substantially and persistently, and that the effects were not confined to periods of financial disruption. **The skeptical case** — Greenlaw, Hamilton, Harris and West, *A Skeptical View of the Impact of the Fed's Balance Sheet* (2018) — attacks the method. Event studies pick a handful of "QE announcement dates," but the dates are chosen by researchers who already believe QE works: 18 March 2009 drove the 10-year yield down 47 basis points and appears in every study, while the 29 April 2009 statement reversed about 10 basis points upward and appears in almost none. Examining all 255 FOMC announcements, minutes and Chair speeches from October 2008 to December 2017, they find cumulative yield changes on Fed announcement days were *upward* during QE episodes. Their sharpest point is the **symmetry problem**: market reaction to the 2017 [[Quantitative Tightening]] announcements was negligible. If QE lowered yields by 100 basis points, why did unwinding it do nothing? That question is still open. ⭐ **The honest summary:** near-consensus that the March 2020 market-functioning intervention worked and worked fast; much less agreement about the marginal macroeconomic effect of QE2 and QE3 in already-functioning markets. A decade of undershooting the inflation target is itself evidence the macro effects were not large. ## The politics QE became a conservative and libertarian rallying point in a way it never did on the left during 2009–2014, fusing opposition to bank bailouts, deficits and the Fed into a single object for the [[Tea Party Movement]]. The **open letter to Bernanke of 15 November 2010**, organized by four Hoover Institution fellows and signed by 23 people, demanded that the purchase plan "be reconsidered and discontinued" because it risked **"currency debasement and inflation."** Its composition is the interesting part: academic economists, movement-conservative writers and hedge fund principals in roughly equal measure, which indicates an objection as ideological as it was technical. The prediction failed. PCE inflation ran *below* the 2% target for most of 2012–2019, and on **27 August 2020** the Fed adopted flexible average inflation targeting — a framework change explicitly premised on persistent *undershooting*, the opposite of the letter's warning. Signatories paid no professional cost: two went on to lead the World Bank and chair the Council of Economic Advisers respectively. When inflation did arrive in 2021–22, from pandemic supply disruption and fiscal transfers, both sides claimed vindication — critics that they were merely early, defenders that a forecast missing by a decade and getting the mechanism wrong is simply wrong. [[Ron Paul]]'s *End the Fed* (September 2009) supplied the movement's text, arguing the Fed is unconstitutional, was created to bail out banks, and that inflation is a "hidden tax" falling hardest on the poor. Chairing the House Financial Services subcommittee on monetary policy in 2011–13 gave the critique a legislative platform, and his Federal Reserve Transparency Act ("Audit the Fed") passed the House in July 2012 without Senate action. A **left** critique emerged later and from the other direction: that QE was an inadequate substitute for fiscal policy and that its asset-price effects favored capital over labor. The two critiques share a conclusion about distribution and disagree entirely about the remedy. > [!note] Fiscal entanglement — the part that became a number > Because the Fed holds long-duration fixed-rate assets funded by floating-rate liabilities, the 2022–23 rate hikes inverted its net interest margin. Remittances to the Treasury **turned negative in September 2022**, having run $5–10 billion a month for most of the prior decade, and the Fed booked a **deferred asset** it must pay down out of future earnings before remittances resume. This converts an abstract argument about central-bank independence into a concrete fact: QE and QT together produced a period in which the Fed sent the Treasury nothing. *(The deferred-asset balance moves; check a current H.4.1 rather than citing a stale figure.)* ## See Also - [[Quantitative Tightening]] — the reversal, and why it is harder - [[Ample Reserves]] — the operating framework QE created - [[Standing Repo Facility]] · [[Overnight Reverse Repo Facility]] — the plumbing - [[Term Premium]] — what portfolio balance is supposed to move - [[Open Market Operations]] — the conventional tool QE supplements - [[Ben Bernanke]] · [[Jerome Powell]] · [[Ron Paul]] · [[Tea Party Movement]]