Quantitative Easing 2 (QE2)

Quantitative Easing 2 (QE2)

Quantitative Easing 2 (QE2) was the Federal Reserve’s second large-scale asset-purchase program, announced in November 2010 to support the U.S. recovery after the 2008 financial crisis and Great Recession. The program expanded the Fed’s balance sheet by about $600 billion through purchases of U.S. Treasury securities and by reinvesting proceeds from earlier mortgage-backed security (MBS) purchases.

Key takeaways

• QE2 added roughly $600 billion to the Fed’s balance sheet via Treasury purchases and MBS reinvestment.
• It was used because short-term interest rates were at or near zero and conventional policy tools were exhausted.
• Goals were to lower long-term interest rates, support asset prices, increase liquidity, and lift inflation toward target.
• QE2 preceded a later round of easing (QE3, announced in September 2012) and spurred debate over effectiveness and side effects.

How QE2 worked

The Fed bought long-term Treasury securities to push down long-term yields and encourage borrowing and investment. By exchanging newly created bank reserves for securities, the Fed increased the money supply and aimed to:
* Reduce long-term interest rates (mortgage and corporate borrowing costs).
* Raise asset prices (stocks and bonds) to boost wealth and spending.
* Increase liquidity in financial markets and improve credit conditions.

Economic context

When QE2 was launched, the U.S. recovery was fragile:
* Unemployment remained elevated (around 9.8% at the time).
* Consumer prices and inflation remained low, prompting concern about deflationary pressures.
With short-term policy rates already near zero, the Fed turned to balance-sheet tools to provide additional stimulus.

Market effects and outcomes

• Bond yields: The 10-year Treasury yield initially rose above 3.5% after the announcement, but from early 2011 it entered a multi-year decline, falling roughly 200 basis points to below 1.5% over the subsequent two years.
• Asset prices: Equity and some fixed-income asset prices were supported as lower long-term yields reduced discount rates and improved risk appetite.
• Liquidity and lending: QE2 improved market liquidity and lowered borrowing costs, but its impact on bank lending and real economic activity was debated—credit conditions did not uniformly translate into significantly higher lending.

Criticisms and legacy

Critics argued that:
* QE2 risked future inflation by expanding the monetary base.
* It disproportionately benefited asset holders, potentially increasing wealth inequality.
* Previous easing had reduced rates but produced limited improvements in lending and real-sector investment.

Supporters contended the program helped stabilize markets, lowered long-term rates, and reduced the chance of deflation during a fragile recovery. The debate over QE2’s effectiveness and side effects carried into later policy choices, including the launch of QE3 in 2012 and ongoing discussions about balance-sheet normalization and alternative tools for monetary stimulus.

Conclusion

QE2 was a significant unconventional monetary-policy step aimed at lowering long-term borrowing costs and supporting the fragile post-crisis recovery when conventional rate cuts were no longer available. It influenced yields and asset prices and remains a reference point in debates over the benefits and risks of central-bank balance-sheet expansion.