Definition: Quantitative easing (QE) is when the Federal Reserve buys bonds, primarily U.S.

Treasury
notes and mortgage-backed securities (MBS). The Fed issues credit to buy the bonds through its Trading Desk at the New York Federal Reserve Bank.

Where does the money come from to purchase these assets? The Fed simply creates it as credit. This has the same effect as printing money. This expansionary monetary policy spurs economic growth.

Quantitative Easing Explained

How does quantitative easing work? The Fed creates credit, and uses it to buy MBS and Treasuries from its member banks. It helps the banks by taking old debt off of their balance sheets. QE increases the money supply because the banks can then use the Fed's credit to make more loans.

Bank loans stimulate demand by giving businesses more money to expand, and shoppers more credit to buy things with.

By increasing the money supply, QE keeps the value of the dollar low. This made U.S. stocks seem like a relatively good investment to foreign investors, and made U.S. exports relatively cheaper.

Quantitative easing stimulates the economy in another way. The Federal government auctions off large quantities of Treasuries to pay for expansionary fiscal policy. As the Fed buys Treasuries, it increases demand, keeping Treasury yields low. Since Treasuries are the basis for all long-term interest rates, it also keeps auto, furniture and other consumer debt rates affordable. The same is true for corporate bonds, allowing businesses to expand more cheaply. Most important, QE keeps mortgage rates low. And that's important to support the housing market.

Quantitative easing has always been a part of Fed policy. Even before the recession, the Fed held between $700-$800 billion of Treasury notes on its balance sheet, varying the amount to tweak the money supply.

QE1
The Fed really leaned on quantitative easing to combat the financial crisis of 2008. It had already reduced the Fed funds rate as low as it could -- effectively at zero. For more, see Current Fed Interest Rates.

Its other tools of expansionary monetary policy were also maxed out. The discount rate was near zero. The Fed even paid interest on banks' reserve requirement.

In November 2008, the Fed started buying $600 billion in MBS. In less than six months, this aggressive purchasing program had more than doubled the central bank's holdings of bank debt, MBS, and Treasury notes. The Fed halted purchases in June 2010 because the economy was growing again. Just two months later, the economy started to falter, so the Fed renewed QE1. It bought $30 billion a month in longer-term Treasuries, such as 10-year notes, to keep its holdings at around $2 trillion. For more, see QE1.

QE2
In November 2010, the Fed announced it would increase quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011. This second round of easing was known as QE2. The Fed was actually hoping to spur inflation a bit by increasing the money supply. Expectations of inflation increase demand, which would spur economic growth. That's because people are more likely to buy consumer products now if they know prices will be higher in the future. For more, see The Federal Reserve's Quantitative Easing 2.

Operation Twist
In September 2011, the Fed launched Operation Twist. This was similar to QE2, with two exceptions. First, as the Fed's short-term Treasury bills expired, it bought long-term notes. Second, the Fed stepped up its purchases of MBS. Both "twists" were designed to support the moribund housing market. For more, see What Is Operation Twist?.

QE3
On September 13, 2012, the Fed announced QE3. It agreed to buy $40 billion in MBS, and continue Operation Twist, adding a total $85 billion of liquidity a month. The Fed did three other things it had never done before: 1.It announced it would keep the Fed funds rate at zero until 2015.

2.It said it would keep QE in place until jobs improved "substantially." 3. The Fed acted to boost the economy, not avoid a contraction. (Source: CNBC, Three Things the Fed Did Today It's Never Done Before, September 13, 2012)

QE4
In December 2012, the Federal Reserve changed quantitative easing again with QE4. The Fed announced it would buy $85 billion in long-term Treasuries and MBS. However, it ended Operation Twist, instead just rolling over the short-term bills.

It firmed its direction by announcing it would keep QE4 until one of two conditions were met: either unemployment fell below 6.5% or inflation rose above 2.5%.