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How Quantitative Easing Actually Works, and Why It Makes Asset Prices Go Up

Beginner Investing • 7 min

What this lesson is about

When the Fed 'prints money' to buy bonds, it's not literally printing cash. But the mechanism does push investors into riskier assets, inflating prices.

2 parts · a quick check after each · then the quiz

Part 1 of 2

"The Fed is printing money" is a common phrase for quantitative easing, but it's not exactly true. The Fed doesn't physically print cash for QE. Instead, it creates new bank reserves electronically. Then, it buys large amounts of government bonds (and sometimes other securities) from banks and institutions, which expands its balance sheet.

QE is used when the economy needs help but short-term interest rates are already near zero. The Fed's main tool, cutting rates. Has little room left to work. By buying lots of bonds, the Fed drives bond prices up and yields down. This makes safe assets pay even less.

The central bank balance sheetBoth sides grow together. The money to buy the bonds is the liability it just issued.

Quick check

What does the Federal Reserve actually DO in quantitative easing (QE)?

Part 2 of 2

Insider Angle: Here’s how asset prices get inflated: when safe bonds yield almost nothing, investors looking for returns venture further out on the risk spectrum. They move into corporate bonds, then stocks, and even riskier assets. This drives those prices up. This is sometimes called the "portfolio rebalancing channel," and it's a big reason why QE periods often line up with strong stock market performance. But there's a major criticism: QE’s benefits mainly go to those who already own stocks and real estate. They see those assets increase in value, while its link to wage growth and benefits for everyday folks is much weaker and debated.
Try This: Look up the Fed's total balance sheet size over time (FRED series WALCL, freely available) and see how its growth periods compare to major stock market rallies. Historically, QE times and asset price increases have closely overlapped, but correlation doesn't prove the whole story.

Quick check

Why does QE tend to push investors toward riskier assets like stocks?

Try This - Live Data

The Fed's real, current total balance sheet size (FRED series WALCL).

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Quiz

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