What is QE3: Quantitative Easing Explained in Simple Terms

What is quantitative easing, aka QE? 

And what is QE3? And whatever happened to QE2? Was there ever a QE1?

Well, that's an interesting question. And it's kind of hard to answer. But here's my best shot.

First, why are we talking about QE? On Thursday, the Federal Open Market Committee announced that the Federal Reserve will purchase $40 billion a month in mortgage-backed securities indefinitely (MBS) from financial institutions, will keep interest rates at zero percent until at least 2015, will make additional purchases if the employment picture doesn't improve, and in general will maintain an stimulative policy for a "considerable time."

The announcement sent stock and commodities prices soaring, and the U.S. dollar plummetting, as the Fed gave a clear indication that ZIRP (zero-interest rate policies) and monetary stimulus will be the new normal going forward. 

Although the announcement would seem to fall short of the expectations many had — that the Fed would make asset purchases totaling upwards of $400 billion over the coming months — the open-ended nature of the Fed's latest action makes it clear that more monetary stimulus is not only possible, but probable.

So what exactly did the Fed just do ... what is this whole policy all about? Well, Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value. Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield.

The expression "QE2" became a "ubiquitous nickname" in 2010, usually used to refer to a second round of quantitative easing by central banks in the United States. Retrospectively, the round of quantitative easing preceding QE2 may be called "QE1." Similarly, "QE3" refers to the third round of quantitative easing, announced today, following QE2.

Blah, blah, blah. 

Here's a video that would likly do this question more service: 


That's QE.

How much do you trust the information in this article?

Chris Miles

Chris has worked for media outlets including the Associated Press and Stars and Stripes. He worked with the Clinton Foundation, the United Nations, and with the Kentucky state legislature. He holds a master's degree in political science from the University of Louisville, and a BA in journalism and political science from the University of Kentucky. He is originally from Lexington, Ky. Kentucky basketball occupies a majority of his free time.

MORE FROM

President Donald Trump turns Boy Scout Jamboree into campaign rally

The president discussed health care, Hillary Clinton, Obama, big yachts and more to 40,000 Boy Scouts and volunteers

This child kept HIV in remission for 8 years without drugs. Here’s what that really means.

More than eight years after his initial treatment, the child is still in remission.

Driver charged with human trafficking after 30-40 people found locked in fatally hot tractor-trailer

The charge against James Matthew Bradley, the alleged driver of the vehicle, could carry a punishment as severe as the death penalty.

Charlie Gard’s parents end legal fight to continue treatment for terminally ill son

The parents have withdrawn their request for Charlie to receive treatment in the U.S.

10th person dies after 38 found locked in sweltering tractor-trailer outside Texas Walmart

8 were found dead at the scene; 2 more died after being rushed to the hospital in critical or serious condition.

Dozens killed in deadly car bomb attack in Kabul

The Taliban has claimed responsibility for the deadly attack.

President Donald Trump turns Boy Scout Jamboree into campaign rally

The president discussed health care, Hillary Clinton, Obama, big yachts and more to 40,000 Boy Scouts and volunteers

This child kept HIV in remission for 8 years without drugs. Here’s what that really means.

More than eight years after his initial treatment, the child is still in remission.

Driver charged with human trafficking after 30-40 people found locked in fatally hot tractor-trailer

The charge against James Matthew Bradley, the alleged driver of the vehicle, could carry a punishment as severe as the death penalty.

Charlie Gard’s parents end legal fight to continue treatment for terminally ill son

The parents have withdrawn their request for Charlie to receive treatment in the U.S.

10th person dies after 38 found locked in sweltering tractor-trailer outside Texas Walmart

8 were found dead at the scene; 2 more died after being rushed to the hospital in critical or serious condition.

Dozens killed in deadly car bomb attack in Kabul

The Taliban has claimed responsibility for the deadly attack.