Quantitative Easing and Quantitative Tightening

Quantitative easing (QE) and quantitative tightening (QT) are monetary policy tools central banks use beyond simply adjusting interest rates, typically deployed when conventional rate policy alone is seen as insufficient.

Under QE, a central bank creates new reserves to purchase financial assets, typically government bonds, from the market. This adds liquidity to the financial system and tends to push down longer-term borrowing costs, aiming to encourage lending, investment, and spending during periods of economic weakness. QT works in the opposite direction: the central bank reduces its balance sheet, either by letting bonds mature without reinvesting the proceeds or by actively selling assets, which withdraws liquidity from the system.