Golden Encyclopedia | What is Quantitative Easing? How does it work?

Source: CoinTelegraph; Compilation: Bai Shui, Golden Finance

1. Explanation of Quantitative Easing (QE)

Quantitative easing (QE) is a non-traditional monetary policy tool used by central banks, especially when interest rates are already very low and cannot be lowered further.

It became popular during the global financial crisis in 2008, when traditional monetary tools like lowering interest rates were insufficient to stimulate economic growth.

The main goal of quantitative easing is to stimulate the economy by increasing the money supply. This is achieved by encouraging banks to increase lending and lowering borrowing costs for consumers and businesses. When the central bank implements quantitative easing policies, it purchases government bonds or other securities from the market, injecting cash into the financial system.

Although people sometimes say that quantitative easing is like "printing money," it is different from creating new physical currency. Instead, it increases the amount of digital currency in the economy, which is the balance in bank accounts. This is not cryptocurrency; it is conventional currency created by central banks, which banks use to increase lending, helping to stimulate spending and investment.

Quantitative easing policies will also drive up the prices of assets such as stocks and bonds, as the additional funds seeking returns will increase demand. During the COVID-19 pandemic, governments around the world also used quantitative easing policies to maintain economic stability and support growth.

2. How Does Quantitative Easing Work?

To understand how quantitative easing policies work behind the scenes, it is important to understand the gradual mechanisms that drive this policy.

Quantitative easing does not work through a single action—it operates through a series of events that begin with the central bank and ultimately affect everyday economic activity. The process typically goes as follows:

• Asset purchase: Central banks purchase government securities, such as treasury bonds, from banks and financial institutions.
• Increase the money supply: These purchases fill the financial system with liquidity.
• Lowering interest rates: With more cash on hand, banks will lower interest rates, making loans cheaper.

Promoting loans and spending: Cheaper loans mean more business investment and consumer spending, which are the main drivers of economic growth.

III. The Practice of Quantitative Easing: Historical Cases

Quantitative easing is not just a theory—major central banks have used this policy during times of economic difficulty.

Here are some examples from the real world:

United States (2008-2014; 2020): Global Financial Crisis

After the real estate market crash in 2008, the U.S. economy fell into a deep recession. The following measures can help:

• The Federal Reserve launched three rounds of quantitative easing policies (QE1, QE2, QE3).
• It purchased government bonds and mortgage-backed securities worth trillions of dollars.
• This helps to lower interest rates, support loans, and boost the stock market.

When the COVID-19 pandemic caused the global economy to come to a standstill, the Federal Reserve quickly took action:

• It reintroduced quantitative easing policies, purchasing $120 billion in bonds each month at its peak.
• Its aim is to maintain low borrowing costs and support businesses and households.

Japan (2001-2006, and from 2013 to present): Against deflation

Japan has faced problems of low inflation and sluggish growth for many years. The Bank of Japan (BoJ) stated:

• Started implementing quantitative easing before most other countries.
• Purchased a large amount of government bonds, later including stocks and real estate investment trusts.

Eurozone (2015-2022): Post-Debt Crisis Recovery

After the debt crisis in Greece, Italy, and Spain, the European Central Bank (ECB) launched a quantitative easing policy:

• The European Central Bank purchases government bonds from euro area countries to reduce borrowing costs.
• This provides support for weaker economies, aiming to prevent deflation (price declines).

4. How Quantitative Easing Affects the Cryptocurrency Market

Quantitative easing policies not only affect traditional financial markets but also impact the cryptocurrency market.

When central banks inject more money into the economy, some of that money flows into alternative assets like Bitcoin and altcoins, driving up their prices. As more funds become available for investment, the surge in liquidity often raises the prices of all assets, including cryptocurrencies.

In addition, during periods of quantitative easing, fiat currencies may depreciate due to an increase in the money supply, leading some investors to seek cryptocurrencies to hedge against inflation or currency depreciation risks. Especially Bitcoin, which is often seen as a store of value similar to gold.

For example, during the COVID-19 pandemic in 2020, the Federal Reserve implemented aggressive quantitative easing policies. At the same time:

In March 2020, the trading price of Bitcoin fell below $5,000.

By the end of 2021, this price had soared to over 60,000 dollars.

Key factors for Bitcoin's rise during quantitative easing include heightened inflation concerns and low interest rates prompting investors to turn to alternative assets. One major driving force may be the search for value storage methods outside traditional finance. Therefore, quantitative easing can indirectly promote the prosperity of the cryptocurrency market by influencing investor sentiment and liquidity.

On the other hand: After the end of quantitative easing, cryptocurrencies may be affected.

When the central bank ends quantitative easing or begins to raise interest rates (tightening policy), liquidity will decrease and borrowing costs will rise. This may lead to a correction in risk assets, including cryptocurrencies.

For example, in 2022, the Federal Reserve began its quantitative tightening policy to combat inflation. The price of Bitcoin fell from about $47,000 in March to below $17,000 in December—likely due to investors turning to safer assets and a decline in risk appetite caused by rising interest rates.

5. Quantitative Easing (QE) vs. Quantitative Tightening (QT): Key Differences

Quantitative Easing (QE) and Quantitative Tightening (QT) are two opposing monetary policies adopted by central banks around the world.

Quantitative easing refers to the expansion of the money supply through the purchase of assets such as government bonds, thereby injecting cash into the economy to stimulate economic growth. Its main purpose is to lower interest rates and encourage lending when the economy is struggling.

Quantitative Tightening (QT) is the process by which central banks reduce their balance sheets. It involves selling assets or allowing them to mature, thereby decreasing the money supply. The goal of Quantitative Tightening is to cool down an overheating economy and prevent inflation from rising too quickly.

The key difference between quantitative easing (QE) and quantitative tightening (QT) is their impact on central bank balance sheets: QE expands balance sheets, while quantitative tightening shrinks balance sheets. In terms of market effects, quantitative easing tends to push up asset prices, while quantitative tightening can lead to lower asset prices and higher interest rates. Both of these policies can significantly impact inflation and market stability.

Are the Federal Reserve's reduction of bond purchases and quantitative easing policy the same?

No, reduction and quantitative easing are not the same - but they are interrelated.

• Quantitative easing refers to the Federal Reserve's active purchase of government bonds and other assets to inject funds into the economy and lower interest rates.
• Tapering refers to the Federal Reserve slowing down the pace of asset purchases - this is the beginning of the end of quantitative easing policies, not a reversal.

6. Will the Federal Reserve Tighten or Ease in 2025?

As of April 2025, the Federal Reserve is facing a complex economic situation characterized by persistent inflationary pressures and slowing economic growth.

In this regard, the Federal Reserve maintained the benchmark interest rate in the range of 4.25%-4.50%, indicating a cautious attitude towards adjustments in monetary policy.

Although the Federal Reserve has not fully shifted to an easing stance, it has begun to slow down the pace of quantitative easing. Specifically, starting in April, the Federal Reserve will reduce the monthly issuance of U.S. Treasury bonds from $25 billion to $5 billion, while continuing to allow $35 billion of mortgage-backed securities to mature without reinvestment.

Looking ahead, the Federal Open Market Committee (FOMC) expects to possibly cut interest rates twice in late 2025, depending on economic conditions. This forecast reflects the Federal Reserve's attempt to balance the dual mission of controlling inflation and supporting employment amid various uncertainties, including the impact of recent tariff policies.

7. The Pros and Cons of Quantitative Easing

Quantitative easing policies can stimulate growth and reduce borrowing costs, but excessive use may exacerbate inflation, asset bubbles, and long-term policy challenges.

Advantages

• Quantitative easing policies help stimulate economic activity by increasing the money supply and encouraging loans and investments.
• By purchasing government bonds, quantitative easing has lowered interest rates, making borrowing costs cheaper for businesses and consumers.
• By injecting liquidity into the economy, quantitative easing helps stimulate demand and support price stability, preventing deflation.

drawbacks

• Excessive increase in the money supply can lead to currency devaluation and drive up inflation.
• Loose monetary policy will drive up asset prices, leading to overvaluation of stocks, bonds, or real estate.
• Quantitative easing has increased national debt, making it more difficult for central banks to manage inflation or interest rates in the future.

Ultimately, quantitative easing remains a powerful but double-edged sword: it can stabilize economies in crisis, but it also carries long-term risks that must be managed with caution to avoid repeating past mistakes.