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- Quantitative easing is when a central bank creates new reserves to buy large volumes of government bonds, pushing yields and borrowing costs lower when interest rate cuts alone cannot do the job.
- Because the dirham is pegged to the dollar, Federal Reserve decisions on quantitative easing, and its reverse, quantitative tightening, feed directly into UAE liquidity and borrowing conditions.
- The tool has limits. Pushed too far, it can add to inflationary pressure, and its effects can reverse once a central bank starts shrinking its balance sheet again.
The UAE dirham has been pegged to the US dollar since 1997, so when the Federal Reserve reaches for a tool like quantitative easing, the effects do not stay in Washington. ⁽¹⁾
They move directly into UAE borrowing costs, bank liquidity, and the returns on dirham savings.
Quantitative easing, or QE, is what happens when a central bank creates new reserves and uses them to buy large volumes of government bonds.
The aim is to push borrowing costs down when interest rate cuts on their own are not enough to support the economy.
How Quantitative Easing Moves Markets
The mechanism starts with bond buying. When a central bank purchases government bonds in large volumes, demand for those bonds rises. Bond prices move up, and yields, which move in the opposite direction to price, fall.
Lower yields ripple outward from there. Mortgage rates and corporate borrowing costs typically track government bond yields, so they ease too.
Freddie Mac data shows the average 30-year US mortgage rate fell from 6.03% in 2008 to 5.04% in 2009, during the Fed’s first quantitative easing programme. ⁽²⁾
Cheaper borrowing is only part of the effect. Investors who would normally hold government bonds look elsewhere for return once yields fall, a process known as portfolio rebalancing.
That flow of capital tends to lift stock prices, corporate bonds, and other higher-yielding assets.
The 2008 and 2020 Test Cases
The Fed’s first quantitative easing programme, later known as QE1, began in November 2008 as the global financial crisis deepened. The central bank purchased $1.75 trillion in Treasury securities, agency debt, and mortgage-backed securities. ⁽³⁾
Two further rounds followed, and by 2014 the Fed’s balance sheet had grown nearly five-fold, from around $900 billion to $4.5 trillion. ⁽⁴⁾
The 2020 response was faster and larger. As COVID-19 shut down economic activity worldwide, the Fed’s balance sheet expanded from $4.2 trillion in March 2020 to $7.6 trillion within a year. It eventually peaked near $8.97 trillion in April 2022, more than double its size before the pandemic. ⁽⁵⁾
When Quantitative Easing Loses Control
Pumping large volumes of new reserves into the financial system can add to inflationary pressures, particularly if the buying continues after an economy has already started to recover.
US inflation peaked at 9.1% in June 2022, the fastest pace in four decades. Supply chain disruption, energy prices, and strong post-pandemic demand all played a role. ⁽⁶⁾
Economists still debate how much of that surge traced back to the scale of pandemic-era QE, but the size of the balance sheet expansion is widely cited as a contributing factor.
Quantitative Tightening: QE in Reverse
The reverse process is called quantitative tightening, or QT.
Instead of buying bonds, the central bank lets its existing holdings mature without reinvesting the proceeds, shrinking its balance sheet and pulling liquidity back out of the system.
The Fed ran QT from June 2022, cutting its balance sheet from a peak of $8.97 trillion to around $6.7 trillion by mid-2026. Policymakers ended the runoff in December 2025, choosing to hold the balance sheet roughly steady rather than shrink it further. ⁽⁷⁾
Every Federal Reserve rate decision since has been read against that backdrop, since a central bank balance sheet that is no longer shrinking removes one source of upward pressure on global yields.
