What is quantitative easing and how does it work?

Quantitative easing is a monetary policy used by central banks to stimulate the economy when traditional monetary tools, such as lowering interest rates, become ineffective. It involves the large-scale purchase of financial assets, typically government bonds, by a central bank. The primary aim of quantitative easing is to increase the money supply in the economy, promote lending, and encourage investment and consumption. When a central bank, such as the Federal Reserve or the European Central Bank, implements quantitative easing, it creates new money electronically to buy these financial assets. This process injects liquidity into the financial system, which lowers interest rates on loans and bonds. As investors seek higher returns, they may turn to equities or other investments, thereby boosting overall market confidence. As the central bank purchases these assets, it increases their prices while simultaneously lowering their yields, which indirectly encourages banks to lend money at more favorable rates. This creates a ripple effect, where lower borrowing costs can lead to increased consumer spending and business investment. Ultimately, the goal is to boost economic growth, reduce unemployment, and avoid deflation. However, quantitative easing carries risks, such as potential asset bubbles and increased levels of inflation if the money supply grows too quickly. Central banks, therefore, must carefully consider the timing and magnitude of such interventions. For detailed information about quantitative easing or its specific implications, one might want to refer to educational resources available on financial institutions' websites.