History of Quantitative Easing in the U.S.

The Federal Reserve is tasked with maintaining economic stability in the U.S., and they do that through monetary policy. While monetary policy is often synonymous with interest rates, the Fed has multiple tools to impact the economy. One of these tools is quantitative easing – the large-scale purchases of assets in open markets.

The Fed has implemented quantitative easing programs four times since the financial crisis of 2007-2008. The most recent of these occurrences was in 2020, and it was a response to the COVID-19 pandemic induced recession. This article will explore the past quantitative easing programs and their effects on the U.S. economy.

What is QE and How Does It work?

Quantitative easing, usually shortened to QE, is a nontraditional monetary policy action that involves purchasing securities on the open market. The goal is generally to stabilize or otherwise manipulate a financial market to benefit the overall economy.

QE is typically implemented as a drastic measure or after other monetary policy tools have been ineffective. This typically means interest rates are already near their lower bound and economic output is still below the central bank’s target before QE is considered.

How does QE work?

In order to buy assets on the market, the Fed creates new bank reserves. This process is commonly referred to as “printing money,” although it is accomplished digitally.

With the newly created funds, the Fed buys securities from major financial institutions. In the past, the Fed purchased Treasury securities and mortgage-backed securities. These purchases effectively swap the bank’s investment holdings for cash while increasing the overall money supply. With more cash, banks are more inclined to make loans.

Effects of QE

When the Fed enters the market as a major buyer of a particular asset, supply and demand principles push the asset price higher. If the assets are investments, like mortgage-backed securities, the price is supported, thereby reducing losses for holders of the investment that might need to sell.

If the assets in question are bonds, prices rise, and therefore, interest rates decline. This encourages individuals and businesses to take on new loans at the lower rates, which stimulates the overall economy.

Additionally, when interest rates are low, investors turn to riskier investments, like equities, to bolster their returns. Due to the additional capital entering equity markets and the incentives for businesses to borrow funds for expansion, QE can lead to larger stock market gains.

Finally, there is a psychological effect of QE. When the Fed is engaged in buying securities, the perception is that they are taking an active role in bolstering the economy. This perception can lead to more confidence in the stability of the underlying securities and stimulated economic performance.

Downsides of QE

While quantitative easing has many benefits, there are also downsides. Since quantitative easing increases the money supply, it can lead to or exacerbate inflation. There is also research showing that large scale asset purchasing can lead to asset bubbles and income inequality, though these findings are somewhat contentious.

History of Quantitative Easing in the US

The U.S. has implemented QE four times with the first program beginning in November 2008 in response to the global financial crisis. The subsequent QE programs have similarities to the initial one, but the type of securities and duration of the programs have varied.

QE1 2008

The global financial crisis and Great Recession led to widespread unemployment and reduced business output. The Fed responded by drastically reducing the Fed Funds Rate from 5.25% in September 2007 to near zero by December 2008. However, the economy continued to contract, which left the Fed to explore innovative new options. Their plan included the purchase of large quantities of securities in an effort to put further downward pressure on yields.

In March 2009, the Fed expanded its asset purchase plan to bolster the still floundering economy. Between March 2009 and March 2010, the Fed purchased $200 billion in agency debt (debt from Fannie Mae, Freddie Mac, and Ginnie Mae), $1.25 trillion in mortgage-backed securities, and $300 billion in long-term Treasury debt. Government purchases during this time frame constituted about 22% of the market for these assets.

In August 2009, the FOMC announced that it would gradually reduce the pace of Treasury purchases with the conclusion being October 2009. Then in September 2009, the FOMC announced the intention to gradually slow other asset purchases with a conclusion in Q1 2010.

QE2 2010

After the conclusion of QE1, business output and employment remained below Fed targets. The Fed Funds Rate was still at its lower bound, so the Fed announced a second round of QE. This time, the Fed only purchased long-term Treasury securities.

On November 03, 2010, Fed leadership announced a plan to purchase $600 billion of long-term Treasuries at $75 billion per month through Q2 2011. These purchases concluded in June 2011.

QE3 2012

In the third quarter of 2012, economic activity was expanding but doing so slowly. Unemployment remained elevated and business investment was slower than the Fed would like.

With the Fed funds rate at the lower bound, the Fed once again turned to QE to spur the economy. On September 13, 2012, monthly purchases of $40 billion in mortgage-backed securities were announced, and a plan to increase long-maturity Treasury securities holdings at $45 billion per month was also implemented.

This round of quantitative easing was different than the previous two iterations because the Fed did not specify a total purchase amount or a timeline for the purchases to conclude. This left purchases open-ended and dependent on market conditions. Then in December 2013, the Fed announced tapering of purchases under QE3. The purchases concluded in October 2014.

QE4 2020

Rates were already historically low heading into the pandemic, with the Fed Funds Rate was between 1.5 and 1.75% leading into March 2020. The Fed cut interest rates twice in that month, bringing them to near zero. Because rates were already so low, the stimulus to the economy was limited.

At the March 15 meeting, the Fed also began QE4 which included purchases of $80 billion in agency debt and $40 billion in mortgage-backed securities each month. Like in 2012, the Fed did not specify a total purchase amount or a specific timeline for purchases.

By the time QE4 ended in spring 2022, the size of the Fed’s balance sheet had more than doubled – from $4.2 trillion in assets to $8.8 trillion. To put these numbers into perspective, the Treasury held assets equating to 36% of GDP at this time.

Following the end of purchases under QE4, the Fed began quantitative tightening – selling the assets they had accumulated during QE. These sales have continued into 2025 and have brought the size of the balance sheet down to approximately $6.6 trillion.

What Were the Overall Effects of QE 1 – 4?

By most measures, QE1 was the most effective of the first three QE programs. After the announcement of the first QE program, the 10-year Treasury yield dropped by 107 basis points in two days, demonstrating the short-term implications of QE.

Research on the overall effects of QE programs on the economy are more contentious. Some estimates suggest that QE programs have supported economic growth, while others report inconclusive results.

While broad economic impacts are difficult to measure, the effect of QE can easily be seen in the mortgage market. According to The National Bureau of Economic Research, conforming mortgage origination increased by 170% during QE1. QE2 focused only on Treasuries, but mortgage rates declined by about 35 basis points and new loan originations increased by about 65%.

Later, QE3 saw loan rates fall by about 18 basis points and loan originations increase by 15 to 30%. The large-scale purchases of mortgage-backed securities also led to an increase in lending by banks that had held large amounts of those securities prior to quantitative easing.

Another clear outcome of QE programs is a massive increase in the size of the Fed’s balance sheet. The Fed’s assets rose from $882 billion to $4.473 trillion during the first three rounds of QE. Further, the most recent round of QE in 2020 added tremendously to the Treasury’s balance sheet and brought it to a high of about $8.9 trillion.

The results of QE4 on the broader economy are more difficult to determine. The National Bureau of Economic Research concluded that “QE4 did not appear to have any significant effects in reducing term premiums” and “it remains unclear whether the program was associated with any substantial macroeconomic benefits.”

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