Quantitative easing (QE) has upended the world of central banking since the US Federal Reserve (Fed) implemented its first QE program during the global financial crisis. Since 2008 major central banks have pumped over $25 trillion into the global economy with over $9 trillion in response to COVID-19 alone. Now, central banks face the difficult balancing act of pulling back massive asset purchases without disrupting growth.
Scroll to explore our global QE tracker, our in-depth look at the world’s four largest central banks, and an explainer on how QE works.
The Big 4 Central Banks
Inside the Big 4
The Federal Reserve
- In 2018, the US Federal Reserve (Fed) began to unwind its balance sheet by not replacing maturing securities. This trend ended when a crisis in the repo markets forced the Fed’s hand in the fall of 2019. To address the economic shock caused by COVID-19, the Fed began purchasing assets at an average rate of $120 billion per month. Since early 2020, these purchases have grown the balance sheet by more than 80 percent. With higher inflation and decreasing unemployment, the Fed must decide when to start the process of reducing its asset purchases.
- Low unemployment, accelerating wage growth, and inflation near 2 percent allowed the Fed to start unwinding its balance sheet in 2018. When COVID-19 hit the US economy, Fed Chair Jerome Powell committed to purchase assets “in the amounts needed to support smooth market functioning”.
- Many central banks’ QE operations combine outright security purchases with the creation of lending facilities to ensure all sectors of the economy have access to credit. In response to COVID-19, the Fed established 9 emergency lending facilities to provide financing to corporations, municipalities, and small- and medium-sized businesses, among others. After a significant initial uptake, the remaining lending facilities now only account for less than 2 percent of the Fed’s overall QE operations.
- Outright security purchases represent 98 percent of overall Fed QE. US Treasury securities make up about 69 percent of the Fed’s total asset purchases with mortgage-backed securities backed by Fannie Mae and Freddie Mac accounting for almost all of the remaining purchases.
- Setting the key interest rate is every central bank’s traditional tool to maintain price stability and ensure maximum employment. With its new forward guidance, the Fed indicated that the policy rate will remain unchanged through 2023 and outlined the goal of averaging 2 percent inflation over time. These steps are meant to increase inflation expectations among market participants and underscore the Fed’s commitment to higher inflation. However, rapidly rising inflation in 2021 is putting the Fed’s commitment to its forward guidance to the test.
The European Central Bank
- In response to COVID-19, the European Central Bank (ECB) created the Pandemic Emergency Purchase Program (PEPP) to support the euro area economy and financial markets. PEPP complements the ECB’s asset purchase programme. Together, both QE programs have increased the size of the balance sheet by 83 percent since the beginning of the pandemic.
- With inflation near the target of 2 percent, the ECB ended its QE program in December 2018. Worsening economic conditions compelled the ECB to restart asset purchases in November 2019. When COVID-19 hit the euro area economy, the ECB launched its PEPP buying program.
- Many central banks’ QE operations combine outright security purchases with setting up lending facilities to ensure all sectors of the economy have access to credit. The ECB established targeted longer-term refinancing operations to incentivize bank lending to businesses and households. This lending facility currently accounts for 32 percent of the ECB’s overall QE operations.
- Outright security purchases represented 68 percent of overall ECB QE. The ECB’s public sector purchase programme, which mostly buys euro area government bonds, makes up about 81 percent of the bank’s total asset purchases.
- Setting the key interest rate is every central bank’s traditional tool to maintain price stability. In 2014, the ECB took the unprecedented step of cutting its deposit rate (one of its three main interest rates) below zero. Alongside QE, negative interest rates are another tool in the ECB unconventional monetary policy playbook to boost economic growth and support inflation. In 2021, the ECB followed the Fed’s lead by establishing average inflation targeting. This will allow the ECB to let inflation moderately overshoot the traditional 2 percent target for some time before tightening its policy stance.
Bank of England
- In response to COVID-19, the Bank of England (BoE) put in place a 895 billion-pound QE program to support the UK economy and financial market functioning. The bank’s asset purchases have increased the size of the balance sheet by more than 90 percent since the beginning of the pandemic.
- The BoE put in place QE programs in response to the global financial crisis in 2009, the Eurozone crisis in 2012, the Brexit referendum in 2016, and finally the COVID-19 pandemic in 2020.
- Many central banks’ QE operations combine outright security purchases with setting up lending facilities to ensure all sectors of the economy have access to credit. The BoE established three lending facilities in response to COVID-19 including the Term Funding Scheme that can support more than 100 billion pounds in bank lending with a focus on small- and medium-sized enterprises. The lending facilities currently account for 12 percent of the BoE’s overall QE operations.
- Outright security purchases represent 84 percent of overall BoE QE. UK government securities make more than 95 percent of the BoE’s total asset purchases with corporate bonds accounting for almost all of the remaining purchases.
- Setting the key interest rate is every central bank’s traditional tool to maintain price stability. COVID-19 compelled the BoE to lower its interest rate to a record low of 0.1 percent. Rapidly rising price levels, which the BoE considers to be largely temporary, might put some pressure on rates to increase. Markets expect a first rate hike in the summer of 2022.
Bank of Japan
- In response to COVID-19, the Bank of Japan (BOJ) doubled the pace of its QE program by committing $874 billion to support the Japanese economy and financial market functioning. Together with the bank’s increased lending facilities, the new asset purchases have already increased the size of the balance sheet by roughly 25 percent since the beginning of the pandemic.
- In 2001, the BoJ was the first central bank to establish a QE program. Twelve years later, the BoJ put in place its quantitative and qualitative easing program to finally increase lending, spending, and inflation. When COVID-19 hit the Japanese economy, the BoJ conducted its most aggressive expansion of asset purchases yet.
- Many central banks’ QE operations combine outright security purchases with setting up lending facilities to ensure all sectors of the economy have access to credit. The BoJ established two lending facilities in response to COVID-19 to support corporate lending and stabilize repo markets. The lending facilities currently account for 18 percent of the BoJ’s overall QE operations.
- Outright security purchases contribute 84 percent of overall BoJ QE. Japanese government securities make up more than 95 percent of the BoJ’s total asset purchases.
- Setting the key interest rate is every central bank’s traditional tool to maintain price stability. In 2016, the BoJ followed the example of the ECB by cutting its short-term interest rate to -0.1 percent and has maintained this policy stance since then in another attempt to reawaken inflation. This specific interest rate only applies to a small subset of commercial bank’s deposits.
Explainer: How quantitative easing works
When a central bank uses quantitative easing, it purchases large quantities of assets一such as government bonds一to lower borrowing costs, boost spending, support economic growth, and ultimately increase inflation.
“The problem with quantitative easing is that it works in practice, but it doesn’t work in theory.”
– former Federal Reserve Chair Ben Bernanke, 2014
Source: European Central Bank
Research Team: Ole Moehr, Nitya Biyani, Fiona Muhleisen, and Stefan de Villiers
Contributions from: Mrugank Bhusari, Will Bonney, Ekta Deshmukh, Amanda Dickerson, Niels Graham, William Howlett, and Amy Jeon
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