Quantitative Easing (QE: Quantitative Easing) mainly refers to the central bank’s intervention method in which after implementing a zero interest rate or near zero interest rate policy, the central bank purchases treasury bonds and other medium and long-term bonds to increase the supply of base money and inject large amounts of liquidity into the market to encourage Expenses and borrowing are also simplified to describe the indirect printing of money. Quantitative refers to the expansion of a certain amount of currency issuance, and easing means reducing the pressure on banks’ funds. When the securities of banks and financial institutions were purchased by the central bank, the newly issued coins were successfully invested in the private banking system. The government bonds involved in the quantitative easing policy are not only large in amount, but also have a long period. Generally speaking, monetary authorities will take this extreme approach only when conventional instruments such as interest rates are no longer effective.

Under normal economic development, the central bank uses open market operations to fine-tune interest rates, generally by purchasing short-term securities in the market, so as to adjust the interest rate to the set target interest rate. However, quantitative easing is not the case, and its control target is locked in long-term With low interest rates, central banks of various countries continue to inject liquidity into the banking system and put large amounts of money into the market. That is, under quantitative easing, the central bank’s monetary policy on the economy is not a fine-tuning, but a strong medicine.

Implementation method

The central bank can relax money in two ways: changing the price of money (that is, interest rates) or changing the amount of money. For many years, orthodox monetary policy has been centered on the previous policy lever. However, as the inflation rate drops and short-term nominal interest rates approach zero, in principle, the central bank can implement the expansionary monetary policy in the latter way, that is, quantitative leverage. It is the real interest rate, not the nominal interest rate, that affects economic activity. If the economy is in a deflationary state, then even if the nominal interest rate is zero, the real interest rate will remain positive. This is what Japan faced in 2000-nominal interest rates have dropped to zero, but when real interest rates are positive, sluggish money demand is still not enough to make monetary policy effective. This is the “liquidity trap” referred to in the past.

Liquidity trap

There are three main unconventional ways for the central bank to loosen money. First, the central bank can cultivate the expectation that short-term interest rates will remain low for a long time through communication with the outside world or quantitative easing. In fact, from March 2001 to March 2006, the main purpose of the Bank of Japan’s quantitative easing policy was this. For another example, in August 2003, the Federal Reserve’s Open Market Committee stated in the communiqué that “adaptive policies will last for a long time” is also an example of such relaxation of monetary commitments. Second, the central bank can expand the size of its balance sheet to control inflation expectations. Third, the central bank can change the structure of its balance sheet. If investors regard different assets as incomplete substitutes, the central bank’s purchase of specific assets will have a significant impact on asset prices. In this regard, the best example is the long-term US Treasury bonds. Theoretically, the Fed can buy U.S. Treasury bonds on a large scale to curb the rise in yields; the Bank of Japan did this during the period of its quantitative easing policy. Although the above three methods of quantitative easing have different concepts, they can replace each other in operation.

Policy implementation stage

Taking the quantitative easing implemented by the Federal Reserve as an example, its policy implementation can be roughly divided into four stages

Zero interest rate policy

The starting point for quantitative easing policies is often a sharp drop in interest rates. When the interest rate tool fails, the central bank will consider the interest rate economy through quantitative easing policies. Since August 2007, the Fed has cut interest rates 10 times in a row, and the overnight lending rate has dropped from 5.25% to between 0% and 0.25%.

Supplement liquidity

From the outbreak of the financial crisis in 2007 to the bankruptcy of Lehman Brothers in 2008, the Fed rescued the market as the “lender of last resort”. Acquiring part of the non-performing assets of some companies and launching a series of credit instruments to prevent excessive liquidity shortages in financial markets and financial institutions at home and abroad. At this stage, the Fed will expand the objects of supplementary liquidity (in fact, money injection) from traditional commercial banks to non-bank financial institutions.

Actively release liquidity

From 2008 to 2009, the Federal Reserve decided to buy 300 billion US dollars of long-term Treasury bonds and a large number of mortgage-backed securities issued by Fannie Mae and Freddie Mac. At this stage, the Federal Reserve began to directly intervene in the market and directly funded companies in trouble; it directly acted as an intermediary and directly released liquidity to the market.

Lead the market to fall in long-term interest rates

In 2009, US financial institutions gradually stabilized, and the Fed gradually purchased US long-term Treasury bonds through open market operations. Try to use this operation to guide the market to lower long-term interest rates and reduce the interest burden on debtors. At this stage, the Fed gradually returned from the front and back to the backstage, providing funds for the society’s economy through quantitative easing.

What are the quantitative easing strategies?

  1. First, the central bank implements a zero interest rate or nearly zero interest rate policy.
    Due to the low interest rate, many funds will not choose to stay in the bank, which will promote the increase of people’s consumer spending and stimulate domestic demand.
  2. Secondly, the central bank increases the supply of base money by purchasing medium and long-term bonds such as treasury bonds from banks and other financial institutions.

Among them, the amount of Treasury bonds generally purchased is very large and the cycle is long. Increasing the supply of money will inject a large amount of liquidity into the market. When people have easier access to funds, they can increase borrowing and thus increase employment opportunities.