Definition
Quantitative easing is a monetary policy in which a central bank purchases large quantities of long-maturity government bonds and other securities to push down longer-term interest rates after short-term rates have already been cut to near zero.
Why it matters
When short-term interest rates are already near zero, the Federal Reserve cannot ease monetary policy further by cutting them. Quantitative easing is the unconventional tool the Fed has used in those circumstances to compress longer-maturity yields and broader credit spreads.
How it works
Quantitative easing involves the central bank purchasing long-maturity Treasuries and, in some episodes, mortgage-backed securities and other instruments, paying for the purchases by crediting reserves to the selling institutions' accounts at the central bank. The mechanical effects are to reduce the supply of long-duration bonds held by the private sector, to push their prices up and their yields down, to expand bank reserves substantially, and to flatten the yield curve at the longer end. The Federal Reserve conducted four large quantitative easing programs between 2008 and 2022 — three following the 2008 financial crisis and one during the 2020 pandemic — taking the System Open Market Account holdings from under $1 trillion to a peak near $9 trillion. Quantitative easing is unconventional in the sense that it targets specific securities and quantities rather than the policy rate, but the goal — easier financial conditions — is conventional.
In practice
For an individual evaluating lifetime income decisions during a quantitative easing period, the relevant effect is that longer-maturity bond yields, mortgage rates, and insurer crediting rates are lower than they would be under conventional policy alone. The resulting compression of yields available on insurer general account portfolios is one driver of lower annuity payout rates during such periods. Decisions made during a yield-suppressed environment lock in income at rates that may or may not look favorable when the policy reverses. A professional advising during such an environment should be explicit about the policy regime as part of the rate-environment characterization, because the implications for lifetime income are different from a low-rate environment produced by purely cyclical factors.
In the Longevity Standard Framework
Quantitative easing is supporting vocabulary in the Longevity Standard framework. The policy impacts the yield environment that supports asset-backed claims, compressing the spread between yields available on traditional general account assets and the rates carriers must credit to lifetime income contracts. Periods of sustained quantitative easing produce conditions in which spread-based lifetime income economics are stressed, providing one of the structural conditions that has accompanied the migration of carrier general accounts toward higher-yielding asset classes including private credit and alternative investments. The framework's analysis of carrier general account composition treats the yield environment as upstream of asset allocation decisions; quantitative easing is the policy regime that has most directly shaped the post-2008 yield environment within which those decisions have been made.
Related terms
- Quantitative tightening
- Federal funds rate
- Federal Reserve policy transmission
- Zero lower bound
- Investment yield
- Spread compression
- Yield enhancement strategy
- General account