Quantitative easing (QE)
Quantitative easinginvolves a central bank buying assets in the open market. This usually involves government bonds, the safest asset in the fixed income area, but in some cases, for example, the Bank of Japan, central banks have moved on to other types of assets further along the risk spectrum.
The technical way that quantitative easing helps boost the economy is that if the central bank is spending money to buy these bonds, it is putting that money into the economy. So those institutions that would have traditionally sold those bonds to the central bank now have, let’s say £100 for that bond to use for something else. If they are a financial institution, they may invest it in another type of asset which then helps that asset market; if they are a bank, they might use it to lend out to customers and consumers, stimulating the economy in that way. If they are a household who would now have money from these bonds, households may again spend this money in the retail or housing market.
Quantitative easing is an easing of the economy, easing of money into the system, allowing growth to come from increased money supply.
Quantitative tightening (QT)
Quantitative tightening is exactly the opposite. It’s taking back that money supply by no longer buying assets in that market but selling assets. In this way the central bank sells its balance sheet assets, basically all the bonds that they’ve got at their balance sheet at the moment, and reduces the money supply floating around in the economy. Central banks at the moment (November 2018) are considering QT in some way: the United States Federal Reserve is reducing its balance sheet at a very soft pace per quarter, but is still reducing the amount of assets that it owns, and thereby the amount of assets that it’s purposefully circulating in the economy. The European Central Bank is no longer adding as much to its balance sheet – this means it’s not in ‘tightening’ phase, per se, but it’s more neutral than it was one year ago.
Across the world, different central banks will attack QE and QT at different paces – it’s all very much related to what’s going on in that local economy which forms the basis of the decision as to whether easing or tightening is appropriate.
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