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Fed Announces QE3, Extends Operation Twist And Delays First Rate Hike To Mid-2015 Print E-mail
Special Reports | Written by | Sep 14 12 05:31 GMT

Fed Announces QE3, Extends Operation Twist And Delays First Rate Hike To Mid-2015

The Fed announced additional quantitative easing measures, together with extension of operation twist and change in the interest rate guidance, in September as the pace of US economic recovery has been sluggish so far. The Fed expressed its concerns about the downside risks to the economy, the long-term unemployment, the possibility that inflation would stay below its target over the medium-term. Investors responded positively to the long-awaited QE3 sending the DJIA and the S&P 500 indices +1.55% and +1.63% higher.

Chairman Ben Bernanke announced a number of policy changes to stimulate the US economy. First, he initiated purchases of agency mortgage-backed securities, starting tomorrow at a total of US$23B through the end of the month and then at a rate of US$40B per month for an open-ended period. Buying would continue until the employment market has shown desirable improvement. This program, as we mentioned in our preview would be different from the previous one which had defined a fixed period and amount. The Fed maintained the option to alter the 'size, pace and composition of its asset purchases' as appropriate, suggesting the purchase amounts might be adjusted depending on economic conditions. Meanwhile, operation twist will continue through the year-end. It is also mentioned in the policy statement that 'if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency MBS, undertake additional asset purchases, and employ [other policy tools] as appropriate'.

The interest rate guidance was adjusted as policymakers decided to keep the Fed funds rate at 0-0.25% 'at least through mid-2015' from previous forecast of 'late-2014'. More importantly, the Fed stated that it 'expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable length of time after the economic recovery strengthens'. This is a strong language than previously and indicates the Fed’s commitments to leave interest rates at low levels even if the outlook begins to improve.

Only one member, Richmond Fed President Jeffrey Lacker, dissented the decision. He opposed additional asset buying and preferred to omit the interest rate guidance. Overall, the Fed has made bold shift in the monetary policy, suggesting that accommodative measures would continue until economic data has shown desirable improvement.

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