December 16, 2008 / 8:15 PM / 9 years ago

FACTBOX: What is quantitative easing?

NEW YORK (Reuters) - The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession.

“The message is they’re instituting quantitative easing on a fairly large scale,” said Doug Roberts, chief investment strategist at Channel Capital Research.com.

Under quantitative easing, central banks flood the banking system with masses of money to promote lending. They usually do this when lowering official interest rates no longer is effective because they already are at or near zero.

The central banks add cash by buying up large quantities of securities -- government debt, mortgages, commercial loans, even stocks -- from banks’ balance sheets, giving them plenty of new money to lend.

It is a tool used by Japan earlier this decade to combat deflation and stimulate the economy.

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