How does quantitative easing transform markets? The Federal Reserve's decisive shift

After four years of implementing restrictive measures, the Federal Reserve has begun a fundamental shift in its monetary strategy. Starting in September 2025, the institution began to cut interest rates, paving the way for a new round of quantitative easing. This change marks one of the most critical moments for understanding how central banks shape the global economy and financial markets.

How liquidity injection works through QE

Quantitative easing is the tool through which central banks pump fresh capital into the economy. The mechanism is straightforward: these monetary authorities acquire massive financial assets, especially government bonds, to increase liquidity in the system. When more money is circulating, interest rates naturally fall, making borrowing cheaper.

With easier credit, both businesses and individuals increase their investments and spending. This dynamic stimulates economic growth and typically benefits stock markets, which respond with steady gains when capital flows freely into assets.

Quantitative tightening: when the central bank tightens the reins

Quantitative tightening works in the opposite way. Central banks reduce liquidity by selling their holdings of assets or simply avoiding reinvestment as they mature. The result is a decrease in available money and, consequently, upward pressure on interest rates.

This monetary tightening slows borrowing, contracts investment, and creates a downward trend in markets. Although it may seem harmful, these restrictive measures are effective in fighting inflation and cooling an overheated economy, as was the Federal Reserve’s goal over the past four years.

Transitioning markets: from restriction to expansion

The effects are dramatically different. While quantitative easing pushes asset prices higher, benefiting investors, quantitative tightening exerts the opposite pressure. Bonds, stocks, and cryptocurrencies respond differently depending on which policy is in effect.

What makes the current moment crucial is that the Federal Reserve is transitioning from a phase of monetary contraction to one of expansion. After maintaining restrictive rates for four years, the rate cuts initiated in September signal the beginning of a new era of quantitative easing. For markets, this shift is broadly bullish, as it historically coincides with increased capital availability, lower borrowing costs, and greater risk appetite among investors.

Quantitative easing is not just an abstract economic policy: it is the direct catalyst for the trends you see in your portfolios and in global markets.