How does quantitative easing work?

To understand how QE functions behind the scenes, it’s important to look at the step-by-step mechanics that drive this policy. 

QE doesn’t work through a single action — it operates through a chain of events that begins with the central bank and eventually influences everyday economic activity. Here’s how the process typically unfolds:

• Asset purchases: Central banks buy government securities, such as treasury bonds, from banks and financial institutions.
• Increasing money supply: These purchases flood the financial system with liquidity.
• Lowering interest rates: With more cash on hand, banks lower interest rates, making loans cheaper.

Boosting lending and spending: Cheaper loans mean more business investments and consumer spending, which are key drivers of economic growth.

Quantitative easing in practice: Historical examples

Quantitative easing isn’t just a theory — it’s been used by major central banks during times of economic trouble. 

Here are some real-world examples of how it worked:

United States (2008–2014; 2020): The global financial crisis

After the 2008 housing market crash, the US economy was in a deep recession. To help:

• The Federal Reserve launched three rounds of QE (QE1, QE2, QE3).
• It bought trillions of dollars in government bonds and mortgage-backed securities.
• This helped lower interest rates, supported lending, and boosted the stock market.

When COVID-19 shut down economies worldwide, the US Fed acted quickly:

• It reintroduced QE, buying $120 billion per month in bonds at its peak.
• It aimed to keep borrowing costs low and support businesses and households.

Japan (2001–2006, and again from 2013 onward): Fighting deflation

Japan was dealing with low inflation and sluggish growth for years. The Bank of Japan (BoJ):

• Started using QE before most other countries.
• Bought large amounts of government bonds and later included stocks and real estate investment trusts.

Eurozone (2015–2022): Post-debt crisis recovery

The European Central Bank (ECB) introduced QE after a debt crisis hit Greece, Italy and Spain:

• The ECB bought government bonds from eurozone countries to bring down borrowing costs.
• This supported weaker economies and aimed to prevent deflation (falling prices).

How quantitative easing impacts crypto markets

Quantitative easing doesn’t just affect traditional financial markets — it also impacts the cryptocurrency market. 

When central banks inject more cash into the economy, some of that money flows into alternative assets like Bitcoin (BTC) and altcoins, driving up their prices. This surge in liquidity often boosts asset prices across the board, including cryptocurrencies, as more money becomes available for investments.

Additionally, during QE, fiat currencies may lose value due to increased money supply, leading some investors to seek out cryptocurrencies as a hedge against inflation or currency devaluation. Bitcoin, in particular, is often seen as a store of value similar to gold. 

For example, in 2020, during the COVID-19 pandemic, the US Federal Reserve launched aggressive QE. At the same time:

• Bitcoin was trading under $5,000 in March 2020.
• By late 2021, it had soared past $60,000.

Key factors behind Bitcoin’s growth during QE include rising inflation fears and low interest rates pushing investors toward alternative assets. Among these, a major driver could be the search for a store of value outside traditional finance. Thus, QE can indirectly contribute to crypto market booms by influencing investor sentiment and liquidity.

The flip side: When QE ends, crypto may suffer

When central banks end QE or start raising interest rates (tightening policy), liquidity is reduced, and borrowing becomes more expensive. This can lead to pullbacks in risk assets, including crypto.

For example, in 2022, the Fed began quantitative tightening to combat inflation. Bitcoin dropped from around $47,000 in March to below $17,000 by December — a decline likely driven by investors shifting to safer assets and reduced risk appetite due to rising interest rates.

Quantitative easing (QE) vs. quantitative tightening (QT): Key differences

Quantitative easing (QE) and quantitative tightening (QT) are two opposing monetary policies used by central banks. 

QE involves expanding the money supply by purchasing assets such as government bonds, which injects cash into the economy to stimulate growth. Its main purpose is to lower interest rates and encourage lending when the economy is struggling.

QT is the process of contracting the central bank’s balance sheet. It involves selling assets or letting them mature, reducing the money supply. The goal of QT is to cool down an overheating economy and prevent inflation from rising too quickly.

The key difference between QE and QT lies in their impact on the central bank’s balance sheet: QE expands it, whereas QT contracts it. In terms of market effects, QE tends to drive asset prices up, whereas QT can lead to lower asset prices and higher interest rates. Both policies significantly influence inflation and market stability.

Are the Fed tapering and quantitative easing the same?

No, tapering and QE are not the same — but they are connected.

• Quantitative easing is when the Federal Reserve actively buys assets, such as government bonds, to inject money into the economy and lower interest rates.
• Tapering is when the Fed slows down those asset purchases — it’s the beginning of the end of QE, not a reversal.

Is the Fed still tightening or easing in 2025?

As of April 2025, the US Federal Reserve is navigating a complex economic landscape characterized by persistent inflationary pressures and slowing economic growth. 

In response, the Fed has maintained its benchmark interest rate within the 4.25%–4.50% range, signaling a cautious approach to monetary policy adjustments.​

While the Fed has not fully transitioned to an easing stance, it has begun to moderate its QT efforts. Specifically, starting in April, the Fed reduced its monthly runoff of Treasury securities from $25 billion to $5 billion while continuing to allow $35 billion in mortgage-backed securities to mature without reinvestment.

Looking ahead, the Federal Open Market Committee (FOMC) projects the possibility of two interest rate cuts later in 2025, contingent upon economic conditions. This projection reflects the Fed’s attempt to balance the dual mandates of controlling inflation and supporting employment amid uncertainties, including the impact of recent tariff policies.

Pros and cons of quantitative easing

Quantitative easing boosts growth and lowers borrowing costs, but overuse can fuel inflation, asset bubbles and long-term policy challenges.

Pros

• QE helps boost economic activity by increasing the money supply and encouraging lending and investment.
• By purchasing government bonds, QE drives down interest rates, making borrowing cheaper for businesses and consumers.
• By injecting liquidity into the economy, QE helps boost demand and supports price stability, preventing deflation.

Cons

• An excessive increase in the money supply can devalue the currency and push inflation higher.
• Easy money can drive up asset prices, leading to overvalued stocks, bonds or real estate.
• QE adds to national debt, making it harder for central banks to manage inflation or interest rates in the future.

In the end, quantitative easing remains a powerful but double-edged tool: capable of stabilizing economies in crisis yet carrying long-term risks that must be carefully managed to avoid repeating past imbalances.