QE3 Announcement: Fed Announces 40 Billion Dollars in Monthly MBS Purchases, ZIRP Through 2015


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On Thursday, the Federal Open Market Committee announced that the Federal Reserve will purchase $40 billion a month in mortgage-backed securities indefinitely (MBS) from financial institutions, will keep interest rates at zero percent until at least 2015, will make additional purchases if the employment picture doesn't improve, and in general will maintain an stimulative policy for a "considerable time."

The announcement sent stock and commodities prices soaring, and the U.S. dollar plummetting, as the Fed gave a clear indication that ZIRP and monetary stimulus will be the new normal going forward. Although the announcement would seem to fall short of the expectations many had -- that the Fed would make asset purchases totaling upwards of $400 billion over the coming months -- the open-ended nature of the Fed's latest action makes it clear that more monetary stimulus is not only possible, but probable.


3:06pm: Bernanke has left the building. And so have I. Live blog, out!

3:04pm: None of the reporters have asked what shape these mortgage-backed securities that the Fed is buying are in. The Fed could be taking on mostly toxic assets for all we know at this point. 

3:00pm: Explanation of MBS purchase program:

On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month.  The FOMC also directed the Desk to continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June and to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS. 

The FOMC noted that these actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 

Purchases of Agency MBS

Consistent with current practice, the planned amount of purchases associated with reinvestments of principal payments on holdings of agency securities that are anticipated to take place over each monthly period will be announced on or around the eighth business day of the prior month.  The next monthly reinvestment purchase amount was also published today, and can be found here:http://www.newyorkfed.org/markets/ambs/ambs_schedule.html.

The Desk anticipates that the agency MBS purchases associated with both the additional asset  purchases and the principal reinvestments will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, although the Desk may purchase other agency MBS if market conditions warrant.

Consistent with current practices, all purchases of agency MBS will be conducted with the Federal Reserve’s primary dealers through a competitive bidding process and results will be published on the Federal Reserve Bank of New York’s website. The Desk will also continue to publish transaction prices for individual operations on a monthly basis.

Frequently Asked Questions associated with these purchases will be released later today.


2:57pm: I'd say Apple's had an ok last 24 hours.

2:52pm: QE3 may also be bullish for Obama's reelection prospects if it has the effect the Fed is hoping it will have -- namely to spur lending and hiring, in order to fill one of its mandates, full employment. The Fed's other mandate is price stability.

2:47pm: No question this latest FOMC action is bullish, as Bernanke has essentially promised the street anything and everything it needs for as long as it needs it. For all intents and purposes, QE3 is an indefinite policy of easing. 

2:39pm: Bernanke is being evasive in defending the Fed's an open-ended policy of monetary easing. The markets don't seem to care though. Equities and commodities are going wild.

2:34pm: U.S dollar shorts getting crushed:

2:28pm: Gold to the moon!

2:27pm: Dow Jones to the moon!

2:24pm: Bernanke: Fed has the "tools and the will" to help speed up recovery.

2:22pm: Bernanke denies that QE hurts savers, but that is tough sell.

2:18pm: Bernanke says Fed will remain accommodative even if/when the economy approves. 

2:15pm: Bernanke is now speaking and will take questions afterwards.

1:28pm: Bernanke's 2:15pm press conference coming soon. 

12:57pm: Let's play "Spot the Point at Which the Fed Announced It Would Intervene," using the 10-year U.S. treasury: 

12:54pm: MarketWatch summarizes the Fed action:

WASHINGTON (MarketWatch) -- By an 11-to-1 vote, the Federal Reserve on Thursday decided to launch a new program of open-ended bond purchases -- so-called QE3 -- saying it will buy $40 billion of agency mortgage-backed securities each month, starting Friday. It's also keeping in place so-called Operation Twist, which consists of swapping short-dated securities for longer-term securities, as well as reinvesting the proceeds of maturing securities, so the central bank will be adding $85 billion of long-term securities each month through the end of the year. The Fed also extended its pledge to keep interest rates exceptionally low -- Fed funds rates are currently targeted at a rate between 0% and 0.25% -- from late 2014 to "at least through mid-2015." The Fed said it's acting "to support a stronger economic recovery" and expects the new program to put downward pressure on longer-term interest rates, support mortgage markets and help make financial conditions more accommodative. Richmond Fed President Jeffrey Lacker, the only dissent, opposed both the asset purchases and the description of the time period will remain exceptionally low.

12:52pm: It remains to be seen whether this latest action by the fend will succeed in easing credit markets. The Fed seems to think there's a (credit) supply problem, and not a demand problem. 

12:45pm: Stocks soar immediately after statement:

12:43pm: Statement on mortgage-backed security purchases from the Fed.

12:37pm: Call it QE2.5. Markets were expecting something bigger, but the Fed showed some restraint as the FOMC has decided to go with a half-measure, perhaps an acknowledgement that inflation is picking up and that additional easing could put too much prices on consumer prices.

12:35pm: Full FOMC statement:

Release Date: September 13, 2012

For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months.  Growth in employment has been slow, and the unemployment rate remains elevated.  Household spending has continued to advance, but growth in business fixed investment appears to have slowed.  The housing sector has shown some further signs of improvement, albeit from a depressed level.  Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.  Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.  The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 

The Committee will closely monitor incoming information on economic and financial developments in coming months.  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.  In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.  In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.  Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

12:30pm: $40 billion in MBS purchases PER MONTH. Fed will continue with Operation Twist, and maintain zero interest rate policies through 2015. 

12:24pm: Snapshot of the Forex. USD down modestly. Yen has hit 7-month high. Crushing for them. QE3 could prompt another BOJ Yentervention. 


12:17pm: Traders appear opting to not stay on the sidelines very much in waiting for the Fed's announcement, as volume has picked up in recent days.

12:16pm: The divergence between equities and employment shows a troubling disconnect between 

12:13pm: The gold market is definitely waiting for some direction, as it's consolidating ahead of the Fed's announcement. 

12:05pm: The technicals of the DJIA are strong and make for an elegant chart since the beginning of 2009. A case could be made that if no QE3 comes today, equities wouldn't necessarily fall apart over the medium to long term.


11:57am: In addition to stocks and oil, gold and silver stand poised for gains from a pro-QE announcement. Though Austrian economists are wary of QE, those who own precious metals can take solace that more easing could send gold to $1,800 an ounce by year's end.

11:55am: Given the already high price of commodities, QE3 could be a serious political liability for the Obama administration. In addition to more QE being a stark admission that the economy is in trouble without immediate intervention from the central bank, monetary stimulus will like boost commodity prices -- notably food and energy prices -- and put strain on the American consumer in the coming months. With the election in two months, QE3 now could endanger Obama's reelection prospects.

11:41am: Oh by the way, Greece looks like it will need a third bailout. Naturally, stocks in Germany -- Europe's go-to bailer-outer -- aren't taking it well, but London is shaking it off.

11:36am: There's almost no question that anything short of announcement of more QE would send markets into a tailspin. By the same token, if the Fed announces it will do more QE, markets may not see the kinds of gains going forward that some are anticipating because 1) Much of QE3 may already be priced, and 2) Multiple rounds of monetary stimulus can likely yield diminishing returns. 

11:19am: U.S. equities up for the day so far:


At 12:30pm on Thursday the Federal Open Market Committee is expected to give some clear direction as to what course the Federal Reserve will take amidst a slow recovery and a high unemployment rate. It will be the first major statement from the Fed since the Jackson Hole meeting two weeks ago, where Chairman Ben Bernanke did not say whether the Fed would implement another round of quantitative easing, but concluded his highly anticipated remarks by saying, "Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

The knee-jerk reaction in the markets was bearish, as traders and investors inititally took the absence of a QE announcement as an unwillingness on the part of the Fed to act. However, equities and commodities soon pared those losses, and in subsequent days stocks soared, with the Dow Jones index hitting a nearly five-year high, while the NASDAQ reached levels not seen since 2000. Most observers expect the Fed to announce that will enact a third round of asset purchases, either treasuries or mortgage-backed securities, or both. Most estimates place the potential size of QE3 anywhere between $400bn and $600bn. On the other hand, a logical case can be made against more QE, given high stock and commodity prices. QE3 could send equities higher, but also food and energy prices as markets digest the inflationary effects of more easing. Of course, this would assume that QE3 hasn't yet been priced in by the market, but no doubt many investors have recently acted as if QE3 is a foregone conclusion.   

We'll have live updates and market reactions in the lead up to the Fed's big announcement.