Putnam Investments

Quantitative easing: A closer look

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.

Explore more QE1 QE2 Operation Twist QE3 Tapering

A series of bond purchase programs have expanded the Fed’s balance sheet while holding down interest rates.

Since early December, the Federal Reserve has been injecting $85 billion per month of newly created money into the financial system, buying mortgage-backed securities and longer-term Treasuries. November 2008 - March 2010: $1.25 trillion of agency mortgage-backed securities (MBS), representing about 25% of the outstanding market. October 2010 - June 2011: $600 billion in U.S. Treasuries, adding to the approximately $300 billion already on the government's books. October 2011 - December 2012: This program was designed to push down longer-term interest rates by using the proceeds from the Fed's maturing holdings to purchase longer-dated date. September 2012 - present: Targeted purchases of agency MBS of up to $40 billion per month. January 2014 - present: The Fed began reducing the amount of bonds it buys each month, citing improvement in the outlook for the labor market.

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.