Fed to launch
QE3 by buying mortgage securities $40 bln of MBS per-month,
will do more unless job market strengthens by Greg Robb | September 13,
The Fed announced on Thursday a third
round of asset purchases to drive down interest rates and
help lower the unemployment rate
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
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.
The Fed hawks are worried that the core consumer price
inflation is running at a 2.1% rate over the past 12 months
despite the weak economy.
Economists expect sluggish growth for the last six months
of the year. Headwinds from the European sovereign debt
and banking crises are holding the economy back.
There is also mounting concern over a stalemate over U.S.
Deep spending cuts and higher taxes will take effect Jan.
1 unless the two parties unite to change current law.
Fed officials see that slow growth rate extending into 2013
and 2014. The central bank will release updated economic
forecasts at 2:00 p.m. that also include 2015 for the first
Bernanke will hold a press conference at 2:15 p.m.
The open-ended plan is designed to give Fed more options
to adjust the program mid-stream. The central bank can also
keep the program going as long as possible.
St. Louis Fed President James Bullard said in an interview
with MarketWatch late last month that the end-dates of the
first two rounds of asset purchases damaged their effectiveness.
Republicans have been opposed to the Fed’s asset purchases
as government intervention in the economy. On Wednesday,
vice presidential candidate Paul Ryan said he thought they
would do “more harm than good.”
President Barack Obama has generally not commented on Fed
In his Jackson Hole speech, Bernanke said the stagnation
in the labor market was a “grave concern.”
Bernanke said that prior rounds of quantitative easing had
worked and could continue to be effective.
“Overall…a balanced reading of the evidence
supports the conclusion that central bank securities purchases
have provided meaningful support to the economic recovery
while mitigating deflationary risks,” he said.
He said the costs of the program “appeared manageable.”
Bernanke said the first two rounds of asset purchases may
have increased private payroll employment by more than 2
Since the recession ended in June 2010, the economy has
added a total of 2.8 million private sector and government