gold investment, silver investment

Precious metals investment terms A to Z

Quantitative Easing

Quantitative easing is an unconventional monetary policy of buying financial assets in the market, which increases central bank reserves beyond the level needed to keep the short-term interest rates at zero. First used by the Bank of Japan in the early 2000s, it was adopted by the Fed and other major central banks (e.g. the Bank of England or the European Central Bank) after the global financial crisis of 2007–2008 in order to provide financial institutions with liquidity and lower the long-term interest rates (since the short-term rates were already at zero).

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Quantitative Tightening

But wait, what? Quantitative tightening? Was it not supposed to be quantitative easing? Well, no. It’s the reverse. Quantitative easing is an unconventional monetary policy of buying financial assets in the market, which increases central bank reserves beyond the level needed to keep the short-term interest rates at zero. It was the central banks’ response to the Great Recession.

However, as the economy recovered, the Fed started to normalize its monetary policy. Initially, it began tapering, i.e., slowly reducing the amount of money it puts into the economy. As investors worried about the effects of a reduced monetary stimulus, the bond yields spiked. The period of market turmoil after Ben Bernanke announced the Fed’s intention to taper, was called “taper tantrum”. In 2014, the Fed ended buying new assets, but it still reinvested the interests and principal payments received from the bonds held on its massive balance sheet. And finally, in October 2017, the U.S. central bank started unwinding of its balance sheet. The program was called “quantitative tightening” to emphasize that it was the reversal of the previous quantitative easing.

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