What is quantitative easing?
In order to buy the bonds, the Fed simply creates the money. NPR's Planet Money explains
how it works.
"A big bank — Bank of America, say — has $50 billion in government bonds. They'd sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So the bank just holds on to them.
With quantitative easing, the Fed comes along and says, 'Hey, Bank of America, we'll buy those bonds for a little more than anyone else is willing to pay.' Bank of America says, 'OK, great, send us the money.'
This is where the Fed gets to use central-bank magic. They pay for that $50 billion purchase in new money. They just invent it. That's what the Fed — but nobody else — gets to do.
So now Bank of America has $50 billion they need to do something with. The Fed is hoping that Bank of America will decide to lend that $50 billion to companies and people to invest or spend. That stimulates the whole economy."
This is the third time the Fed has done this since the 2008 crisis, so people in the financial world are calling it QE3.