I just read a good analysis article about what Quantitative Easing is, and I feel the need to share it because this is a topic that many investors still find confusing.

Simply put, Quantitative Easing (QE) or monetary easing is a tool used by central banks when interest rates are near zero and the economy needs urgent rescue. Instead of lowering interest rates further (since there's no room left), they create new money to buy government bonds and other financial assets. The goal is to increase liquidity, encourage lending and investment.

Looking back at history, after the 2008 crisis, the Fed injected nearly $3.7 trillion through three consecutive QE rounds (2008-2014). The ECB also did something similar with about €2.6 trillion from 2015-2018. Even during the COVID period, the Fed continued with at least $120 billion per month. All of these aimed to keep the economy afloat.

But what exactly is quantitative easing? It’s not magic. When buying bonds, the central bank increases asset prices, lowers interest rates, and investors seek yields elsewhere. The problem is, this can create financial bubbles, pushing money into higher-risk sectors.

The downside of quantitative easing is also notable. Injecting too much money can lead to inflation, making the rich richer (mainly benefiting financial institutions), while ordinary people only see prices rise. Japan implemented QE from 2001-2006 but still couldn’t stimulate spending because people were too worried.

The impact on financial markets is also multi-faceted. Bond prices rise, interest rates fall, stocks benefit from excess liquidity, forex is affected (weaker currency), and commodities increase in price due to higher demand. But all these mechanisms can also cause volatility when QE ends.

The important thing to understand is that quantitative easing is not about deciding what to buy or sell, but about knowing when the market might be disrupted. Events related to QE always influence investment decisions, so it’s crucial to closely follow the policies of major central banks.