Quantitative Easing and TighteningQE
Quantitative easing (QE) is a central bank buying large amounts of bonds to push down longer-term interest rates and ease financial conditions. Quantitative tightening (QT) is the reverse: shrinking those holdings, usually by not reinvesting maturing bonds.
When short-term rates are already near zero, central banks need another lever. QE is that lever: buying bonds on a massive scale to pull down long-term rates. QT is the slow unwinding afterwards. Both move bond yields, currencies and stock markets.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- QE and QT, Asset purchases, Balance sheet runoff
- Updated
QE and QT in plain words
Under QE, a central bank buys bonds to bring down longer-term rates on loans and savings.1
It pays for them with money created digitally as central bank reserves.1
QT reduces those holdings — by not replacing maturing bonds, by selling them, or both.1 See Central Bank.
How QE and QT work, step by step
Policy rate is very low
QE is used to lower interest rates especially when the main policy rate has little room to fall.1
The bank buys bonds
Buying bonds pushes up their prices and brings down long-term interest rates.1
Yields fall
Higher bond prices mean lower yields, which feed into other borrowing costs — see Yield to Maturity.
Other assets rise
QE also increases the price of other financial assets, such as equities.1
QT begins
Later, holdings are reduced by not reinvesting maturing bonds, selling, or both.1
Runoff is capped
The Fed planned QT by reinvesting principal payments only to the extent they exceed monthly caps.2
Worked examples
Example 1 — How buying cuts yields
Yield 5% → 4.2%A bond pays a £5 coupon. QE buying lifts its price from £100 to £120.
| Yield before | £5 ÷ £100 = 5% |
| Yield after | £5 ÷ £120 ≈ 4.2% |
The Bank of England uses this example: a price rise from £100 to £120 turns a £5 coupon into a yield of about 4.2%.1
Example 2 — Passive QT with a cap
Holdings −$30bnA central bank holds $800bn of bonds. $40bn mature this month; its cap on runoff is $30bn.
| Maturing | $40bn |
| Allowed to run off | $30bn |
| Reinvested | $40bn − $30bn = $10bn |
| New holdings | $770bn |
Under capped runoff, principal is reinvested only to the extent it exceeds the monthly cap.2
Example 3 — QE money creation
+£1m reservesA central bank buys £1m of government bonds from an asset manager.
| Bonds held by bank | +£1m |
| Reserves created | +£1m |
| Asset manager | Now holds £1m cash |
Central banks can create money digitally as reserves and use it to buy bonds.1
QE vs QT
| Aspect | Quantitative easing | Quantitative tightening |
|---|---|---|
| Action | Buy bonds | Shrink bond holdings |
| Balance sheet | Grows | Shrinks |
| Aim | Lower long-term rates, support inflation | Unwind QE, not mainly to move rates |
| Typical method | Large-scale purchases | Not reinvesting maturing bonds; sometimes sales |
Why traders watch QE and QT
Bond yields
Purchases and runoff move Treasury Bills, Notes and Bonds yields.
Equity valuations
QE tends to support asset prices.
Currencies
Big QE programmes can weaken a currency.
Liquidity
Changes in reserves affect funding markets and SOFR.
Advantages and disadvantages
Advantages
- Gives central banks a tool when rates are near zero.
- Can lower long-term borrowing costs quickly.
- Supports asset prices and spending in a crisis.
Disadvantages
- Can inflate asset prices and inequality.
- Hard to unwind without market stress.
- Effects are uncertain and hard to measure.
- Large balance sheets expose central banks to losses as rates rise.
Going deeper
Read as far as you need. Each level builds on the one before it.
Buying bonds
Beginner
QE is large-scale bond buying aimed at lowering long-term rates.1
Reversing QE
Intermediate
Common mistakes
Calling QE 'printing cash'
QE creates bank reserves, not banknotes handed to the public.
Assuming QT mirrors QE
QT is usually slower and passive.
Ignoring the policy rate
QE and QT work alongside, not instead of, rate decisions.
Expecting instant effects
Impacts on growth and inflation take time.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- QE = central bank bond buying to lower long-term rates.
- It is paid for with newly created reserves.
- QE tends to lift bond and other asset prices.
- QT shrinks holdings, usually by letting bonds mature.
- QE and QT work alongside policy rate decisions.
Frequently asked questions
Is QE the same as printing money?
Does QT raise interest rates?
Which central banks have used QE?
Further learning
- Central Bank
Who runs QE and QT.
- Treasury Bills, Notes and Bonds
The bonds most often bought.
- Yield to Maturity
How bond prices and yields move inversely.
- Federal Open Market Committee
The Fed committee that decides QE and QT.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Bank of England. Quantitative easing (opens in a new tab) Checked .
- Federal Reserve Board. Policy normalization (opens in a new tab) Checked .
- Federal Reserve Board. How does the Federal Reserve affect inflation and employment? (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.