Question

Describe the QE policy. How did the Fed’s balance sheet change? How does QE compare to traditional open market operations?

Answer 1

Quantitative easing (QE)-large-scale purchases of assets by central banks—led to a large increase in the Federal Reserve’s balance sheet during the global financial crisis (2007-2008) and in the long recovery from the 2008-2009 recession.The phrase quantitative easing  was first introduced in the 1990s as a way to describe the Bank of Japan's (BOJ) expansive monetary policy response to the bursting of that country’s real estate bubble and the deflationary pressures that followed. Since then, a number of other major central banks, including the U.S. Federal Reserve, the Bank of England.

QE occurs in unconventional circumstances, when short-term nominal interest rates are very low, zero or even negative.In this case of quantitative easing, the Fed used both federal funds rate manipulation and open market operations to help reduce rates across maturities. The federal funds rate reduction focused on short-term borrowing but the use of open market operations allowed the Fed to also decrease intermediate and longer-term rates as well. QE increases the money supply lowerring the interest rate. This lower interest rate gives room to banks to lend more stimulating the aggregate real economic activity.Further, increasing money supply keeps value of country's currency low thereby making exports cheaper.