The Federal Reserve announced on March 15, 2020 that they would purchase 700 billion U.S. dollars worth of government debt bonds and mortgage-backed securities from domestic financial institutions over the coming months, which is a policy known as quantitative easing (QE). This program of quantitative easing has
the Fed's balance sheet, because they purchased such a huge volume of assets. This action was taken in response to the detrimental impact of the
on the U.S. economy. Other central banks around the world, such as the
What is the purpose of QE?
The goal of QE is to increase the
money supply and lower interest rates by injecting money into banks so that they can extend credit to businesses and consumers at a more attractive interest rate.
This credit can enable
businesses to expand, entrepreneurs to make their dreams a reality, and consumers to become homeowners. Once the economy has recovered, the Federal Reserve reverses the QE by selling the securities back into the market.
What are the risks of QE?
However, QE is only effective if the banks are willing to lend and potential borrowers are willing to take the risk, which isn't always guaranteed in a period of uncertainty. Another potential risk of QE is that lowering interest rates tend to increase
inflation, which can increase the cost of living as businesses face higher raw material costs and pass them onto consumers.
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