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The concept behind Quantity Easing!

Quantitative Easing (QE), the term used for aggressive monetary measures undertaken by the central bank. Measures which usually covered under the ambit of monetary policy, like’ controlling supply of money, availability of money and cost of money or interest rate.

During normal economic conditions central bank primarily support the economy by adjusting interest rates. Similarly, in case of liquidity shortage, central bank simply decrease the interest rates to increase cash flows in the system.

When central bank cannot lower interest rates any more, it can attempt to provide the financial system with new money through quantitative easing, like now’ after the US central bank Federal Reserve lowered the interest rates to near zero levels since Dec’08.

The Process of Quantity Easing

With exclusive powers vetted by the government, the central bank turned on the printing presses, to flood the market with enough cash or liquidity while trying to reboot the economic system under Quantity Easing process.

Theorists believe that it may be possible to increase the quantity of money. The typical way to do this is for the central bank to buy assets in exchange for money. Practically, the quantitative easing process focused on buying securities (like government or banking debt, mortgage-backed securities or even equities) from banks with money to ease pressure on the banks by giving them extra dose of capital.

Now, the question arises, how the central bank gets money to buy all these debts or securities?

The expert opinions may vary and little controversial. The simple answer is that central bank can print more money to supply in the system or it doesn’t even need to turn on the printing press. Central bank can just increase the size of banks’ accounts in its balance sheet.

The accounts kept by banks with the central bank named as reserves, all banks have to hold mandatory reserves from their available funds at the central bank. So, during quantitative easing, central bank builds up excess reserves for banks.

When banks swap their illiquid securities for reserves, the size of their balance sheets shrink. Concerned to keep their own balance sheets static during economic pressures’ they usually start lending to end-borrowers and start putting more liquidity into the economy.

Central banks, to some extent have been engaged in quantity easing from the end of last year. The US Fed publicly uncovered a range of planned initiatives for acquiring securities from the banking system, they might not call the term clearly but there has been a lot of buzz regarding Quantity Easing for Fed actions to contain the economic crisis.

Quantity Easing and Money Supply

Quantity easing is another method of increasing the money supply. Its aim is to increase money flows in the economy, when the normal process of cutting interest rates worked no more, most obviously when interest rates are already low and it’s impossible to cut them further.

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Quantity Easing QE Money Supply Printing Balance Fed Interest Rates Economy Central Bank Liquidity Monetary Measures Securities Debt Economic System Quantitative Easing