$40 bln of MBS per-month, will do more unless job market strengthens

Teaser: Read entire article at original site at marketwatch.com

The Fed announced on Thursday [Sept.13, 2012] a third round of asset purchases to drive down interest rates and help lower the unemployment rate

By Greg Robb

WASHINGTON (MarketWatch) — The Federal Reserve, worried that improvement in the unemployment rate has stalled, announced a third, large purchase of bonds on Thursday in an effort to bring down long-term interest rates and spur growth.

The Fed said it would buy mortgage-backed securities at a pace of $40 billion per month.

The Federal Open Market Committee, which ended a two-day meeting on Thursday, said it was concerned that, without the action, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”Read text of statement.

In addition to bond purchases, the Fed said it intends to keep the benchmark short-term interest rate – the federal funds rate, at nearly zero until mid-2015. The prior guidance on the first rate hike had been late-2014.

The guidance now extends well beyond the term of Fed Chief Ben Bernanke, which ends early in 2014.

The Fed has left the federal funds rate at nearly zero since December 2008.

The committee’s vote was 11 to 1. Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, dissented, as he has at every meeting this year.

The Fed took the aggressive action out of a growing concern for the economic outlook, especially the anemic labor market.

The Fed said it would continue to monitor incoming information.

“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 until such improvement is achieved in a context of price stability,” the FOMC said.

Despite holding interest rates at zero for more than three-and-a-half years, and the central bank buying $2.3 trillion in assets, the unemployment rate has been stuck above 8% since early 2009. There are 12.5 million unemployed workers.

Economists and even Fed officials disagree on whether further asset purchases will have any lasting effect on the economy.

(End teaser from original article, read entire article at original site at marketwatch.com)


Also, a nice addition for everyone’s general understanding – see it at the original article’s page:

A short explanation of QE3.

It’s not a big British cruise ship.

You’ve probably seen countless discussion of will or won’t the Federal Reserve launch QE3 Thursday. But what does that acronym mean?

Quantitative easing is a monetary policy under which a central bank tries to stimulate growth by lowering borrowing costs by buying up debt, thus pushing yields lower. It also puts a lot of money in the hands of people who otherwise had those securities it just bought, so they can go out and buy something else, which has included U.S. stocks.

In the U.S. this has been done through the Fed’s purchases of Treasury and mortgage-related debt (the latter specifically targeting housing finance, with the idea that lower borrowing costs would revive the battered and important housing sector.)

The first two rounds of quantitative easing — QE1 and QE2 — are a big part of what pushed mortgage rates and Treasury yields to record lows recently. So, in theory at least, QE3 would be good for bonds because you have a new, deep-pocketed buyer. (How it plays out in real life is more complicated because of lots of other influences, such as the European debt crisis.)

But it’s a fairly controversial policy, because having a central bank buy up a lot of securities is essentially the same as if it printed money.

That’s seen as potentially creating inflation, and devaluing a country’s currency because they’re making more of it available. Some central banks, such as Germany’s Bundesbank, are strongly against adding extra money to their financial system through special measures like bond buying; critics cite examples like the hyperinflation Germany faced between World War I and World War II as a reason QE is a bad idea.

In general, QE tends to be negative for the dollar, and positive for gold and other hard assets seen as an alternative and hedge against devaluation and inflation.  That’s been the case for gold since 2008. Advocates of QE says it’s a necessary risk to help the U.S. avoid a depression, which would be even worse for the dollar.

The Fed has completed two similar programs already since the Great Recession, so this is seen as the third round – hence called QE3. And Fed Chairman Ben Bernanke has made pretty clear he thinks the policy has been helpful to the economy.