Bernanke Delivers: Open Ended QE3 Begins September 14th

The wait is finally over and Ben Bernanke, like his European counterpart Mario Draghi, didn’t disappoint. On Thursday, the Federal Reserve announced that it would launch another round of quantitative easing (aka QE3) in a further attempt to stimulate the economy.

In an 11-to-1 vote, the FOMC voted to launch a program to buy up to $40 billion per month of agency mortgage backed securities. The program will begin on Friday, September 14th. Going forward, the Fed says that the details of additional MBS purchases will be announced on or around the last business day of the prior month.

The new QE program is “open ended,” meaning that the Fed will continue to fight the battle against a sagging economy and high unemployment until they see that economic conditions, particularly in the area of unemployment, improve.

The new QE program is on top of the so-called Operation Twist, which consists of selling short-dated bonds and buying longer-term securities, as well as reinvesting the proceeds of maturing securities. Thus, through the combination of Operation Twist and QE3, the Fed will be buying $85 billion of longer-term debt securities each month at least through the end of 2012.

In addition, the FOMC extended its “exceptionally low” interest rate language by a full year. In essence, the Fed is pledging to keep interest rates exceptionally low (the Fed funds rates are currently targeted at a rate between 0% and 0.25%) for nearly 3 more years.

The Fed statement which accompanied the announcement said, "The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

The statement added, "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."

The vote was not unanimous however as Richmond Fed President Jeffrey Lacker, opposed both the asset purchases and the description of the time period will remain exceptionally low.

The stock market improved on the news as all the major indices broke out to new 52-week highs after the announcement.

Individual investors may wonder why lower rates on mortgage backed securities are good for the stock market. In response, we will note that the Federal Reserve has two mandates it strives to achieve: stable prices (low inflation) and full employment. In light of the fact that corporate America is responsible for job creation, the Fed understands that a rising stock market helps increase confidence for individuals and corporations alike. Thus, higher stock prices are good for jobs and for consumer spending. And while this approach has never been used before by the Federal Reserve, targeting asset prices (housing and stocks) does seem to be a strategy the current Fed is employing.

Fed Chairman Ben Bernanke, who cited a “grave concern” about the state of the US labor market at the Fed symposium in Jackson Hole last month, will hold a press conference to discuss the Fed’s latest moves at 2:15 pm eastern.

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