## Quantitative Easing (QE) - The Non-Traditional Monetary Tool Changing the Global Financial Market

### What Is QE? Understanding How Non-Traditional Monetary Policy Works

**Quantitative Easing (QE)** or **quantitative easing** is an unconventional monetary policy tool used by central banks to stimulate the economy when traditional measures are no longer effective. Essentially, QE involves the central bank creating new money and using it to purchase financial assets, primarily government bonds and other debt instruments.

The mechanism is quite simple: when policy interest rates are near zero and the economy still isn’t growing, the central bank will buy financial assets from the market. This operation helps increase the money supply in the economy, lowers long-term interest rates, and creates a more accommodative credit environment. As a result, businesses and individuals find it easier to access credit, thereby promoting investment and spending.

QE is often implemented during economic crises or recessions when conventional monetary tools are insufficient to address the issues. However, QE also carries potential risks such as inflation, asset bubbles, and income inequality.

### Turning Points in the History of QE Implementation

After the 2008 financial crisis, major central banks turned to QE as a rescue solution. **The U.S. Federal Reserve (Fed)** conducted three consecutive QE rounds from 2008 to 2014, totaling $3.7 trillion, purchasing government bonds and mortgage-backed securities.

**The European Central Bank (ECB)** launched the PSPP program in 2015, buying over 60 billion euros of bonds monthly (later increased to 80 billion euros in 2016) until 2018, totaling approximately 2.6 trillion euros. This program aimed to combat deflation risks within the eurozone.

During 2020-2021, amid the COVID-19 pandemic and recession, the Fed continued purchasing bonds at a minimum of $120 billion per month ($80 billion in US Treasury bonds and $40 billion in mortgage-backed securities).

**The Bank of Japan (BOJ)** also implemented QE from 2001 to 2006 to escape prolonged recession, although its effectiveness was limited due to public skepticism about the economy.

### Multi-Dimensional Impacts of QE on Financial Markets

**Bond Market:** When the central bank buys bonds, demand surges, bond prices rise, and yields fall. This effect extends across the entire fixed-income market, lowering yields on corporate bonds and other debt instruments, encouraging lending.

**Stock Market:** QE injects abundant liquidity into the economy. Investors seeking higher returns shift from bonds to stocks. Increased demand drives up stock prices, creating a bullish market.

**Foreign Exchange Market:** As money supply increases, the currency tends to depreciate against others. A weaker currency benefits export-dependent countries by making their products more competitive internationally. Data from 2008-2012 shows the dollar index falling sharply after each QE phase.

**Commodity Market:** QE stimulates economic growth and boosts investor sentiment, increasing demand for oil, gold, and industrial metals. This rising demand pushes commodity prices higher.

### The Dark Sides of QE: Limitations and Risks

**Inflation:** When money supply grows too rapidly relative to real demand, prices are driven up. This negatively impacts consumers and increases production costs for businesses.

**Financial Bubbles:** Low interest rates force investors to seek higher yields in riskier sectors. This can lead to financial bubbles and unwanted market volatility.

**Inequality:** QE mainly benefits financial institutions and wealthy investors. Asset value increases generate profits for asset owners, but low-income individuals do not benefit equally. As a result, the wealth gap widens.

**Limited Effectiveness:** Japan’s experience shows QE is not always effective. Despite implementing QE from 2001-2006, Japan struggled to stimulate spending due to public economic pessimism. QE also led to yen depreciation, increasing import costs.

The US case (2008-2014) also revealed unintended consequences: rising inflation, inflated asset bubbles, increased wealth of financial organizations, and a decline in workers’ living standards.

### Careful Consideration Before Implementing QE

**Quantitative Easing (QE)** is not a magic bullet. It can generate short-term benefits but also carries long-term risks. Deployment of QE must be accompanied by careful management, strict oversight, and coordination with fiscal measures to avoid adverse side effects.

For investors, policy signals related to QE are crucial, directly influencing their investment decisions. Understanding how QE works, its historical applications, and its real impacts across different markets is essential foundational knowledge for navigating today’s financial environment.