Asset Purchases

Asset purchases are a central bank's heavy machinery. When cutting short-term rates is not enough, it creates new money and uses it to buy government bonds and sometimes other securities. This is the core of quantitative easing. The Fed called its rounds large-scale asset purchases (LSAPs); the ECB's main version was the Asset Purchase Programme (APP).

Hoovering up bonds drives their prices up and yields down, which makes borrowing cheaper across the economy. For currencies, the usual effect is weakening: more money, lower yields, less reason for foreign money to stay. When purchases slow, markets talk of tapering; when the central bank sells or lets bonds roll off, it is shrinking its balance sheet.