What Is Quantitative Easing?

Moneybox
A blog about business and economics.
Sept. 14 2012 1:43 PM

What Is Quantitative Easing?

For the perplexed, what does "quantitative easing" mean?

It's a terrible term. But here's how it works. The Federal Reserve buys or sells bonds to try to alter interest rates. In normal monetary policy the way it does this is by setting a target interest rate and then buying (or selling) bonds to try to hit the target. When it does "quantitative easing" what it does is specify a quantity of bonds that it's going to buy and let the markets do with this what they will.

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Why call that "quantitative easing"? Because you're specifying a quantity rather than a target. And why do it that way rather than setting a target and then hitting it? I also have no idea. I like to think the world will look back on the Quantitative Easing Era as a period of baffling linguistic and conceptual confusion. It's much better to set a target and then do the necessary quantity than to specify the quantity and leave the target unclear.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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