Quantitative Easing

Quantitative easing (QE) is an unconventional monetary policy tool in which the central bank purchases large quantities of government bonds (and sometimes other assets) to push down long-term interest rates when the short-term policy rate has already reached the zero lower bound.

The transmission mechanism:

• The Fed buys Treasury securities, increasing demand and raising their prices (lowering yields)
• This compresses the term premium — the compensation investors receive for holding long-duration bonds
• Lower long-term rates reduce borrowing costs for mortgages, corporate bonds, and other credit
• Portfolio rebalancing: investors displaced from Treasuries move into riskier assets, easing financial conditions broadly

The Fed conducted three major QE programs:

• QE1 (2008-2010): purchased $1.75 trillion in Treasuries and MBS during the financial crisis
• QE2 (2010-2011): purchased $600 billion in Treasuries to combat disinflationary pressures
• QE3 (2012-2014): open-ended purchases of $85 billion/month, eventually tapered

During COVID-19, the Fed launched another massive QE program, purchasing over $120 billion/month in Treasuries and MBS from March 2020.

The term premia tool shows how the ACM model's term premium estimates were compressed into negative territory during QE periods, reflecting the removal of duration risk from the private market. The blog post "The End of the Hedge" discusses how QE era dynamics influenced stock-bond correlations.