The Federal Reserve has used quantitative easing, "QE" for short, to drive down interest rates and inject liquidity into the economy in pursuit of maximum employment and price stability, the central bank’s dual mandate. By purchasing large amounts of government bonds in a series of QE programs since 2008, the Fed has pushed rates nearly 60% lower – and may also have increased risk to bond investors.
A series of bond purchase programs have expanded the Fed’s balance sheet while holding down interest rates.
Sources: U.S. Department of the Treasury, Federal Reserve, as of 12/31/13. Past performance is not indicative of future results.
What are the risks?
Many economists believe that interest rates today would be notably higher in the absence of the Fed's bond buying. That means that as the Fed tapers its QE programs, interest rates could begin to head higher, and bond investors could experience losses on their investments. Moreover, the Fed may need to sell many of its assets to public investors over the coming years. If the Fed attempts to sell too much of its holdings too quickly, the excess supply could cause bond prices to drop quickly.