How does quantitative easing work? What is the difference between QE and open market operations? What are the limitations of QE?

Question

How does quantitative easing work? What is the difference between QE and open market operations? What are the limitations of QE?

Answer 1

1. QE is used to increase AD, or increase GDP. QE can work in many ways (Money supply method), but essentially it works by raising asset prices, starting with government bonds, and then spreading out through the wider economy - this gives a boost to bank assets and current bank lending and creates a positive wealth effect for asset holders. Bank lending starts to flow again, leading to increased household and corporate spending.
2. Confidence rises as lending and spending increase.
3. Aggregate demand increases and the economy moves out of recession.
4. The inflation target (2%) is achieved - rather than fall below target as might happen in a recession or periods of low growth and poor expectations.

However, open market is about bonds, These open market operations are the method the Fed uses to manipulate interest rates. The Federal Reserve purchases and sells U.S. Treasury securities on the open market in order to regulate the supply of money that is on deposit in U.S. banks, and therefore available to loan out to businesses and consumers. It purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money.