The Federal Open Market Committee (FOMC) launched a new round of quantitative easing (QE) Thursday, dubbed QE3. The Federal Reserve will buy up to $40 billion of mortgage-backed bonds per month in order to boost the housing market and increase employment.
The market was asking for it and the Fed did not disappoint. “The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month,” reads the Fed’s press release. In addition, the FOMC guaranteed a federal funds rate of 0–0.25 percent until mid-2015, an extension from the previous target of 2014. Furthermore, the Fed will continue the so-called Operation Twist program until the end of the year as planned, in which the bank sells shorter term securities and uses the proceeds to buy longer term securities for a total consideration of $667 billion.
Markets rallied right after the announcement. The Dow jumped 84 points the minute the release hit the wire and extended the gains to close at 13,539, up 206 points or 1.55 percent—a level not seen since the end of 2007. Treasury yields declined, but gold was the outperformer, rising $26 to $1,750 right after the announcement. Gold was up 2 percent at $1,769 at 5:30 p.m. Thursday. The euro also rallied, rising 0.65 percent to $1.2986, as of Thursday 5:30 p.m.
Should these measures not be enough, the Fed stands ready to act to improve employment without jeopardizing price stability: “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate,” which in practice would mean monetizing more treasury bonds. All of the 12 committee members apart from Jeffrey M. Lacker from the Richmond Fed voted for the policy.
