Fed Announces QE3: $40 Billion in MBS, Open Ended, Low

The Federal Reserve announced open ended QE, $40 billion in Mortgage Backed Securities per month. Low rates until 2015. There is no end date. Together with Operation Twist at $45 billion, the program is $85 billion. Fed opens door to more action if necessary.  

EUR/USD is on the rise towards 1.30. USD/JPY fell to 77.12 before rebounding. Update: The dollar is now on the rise on the “buy the rumor, sell the fact” response. Choppy trading will likely continue, and the dollar could fall when Bernanke begins talking. Another update: EUR/USD is back to around 1.29, USD/JPY is higher than before the release.

Update December 12:  Fed Announces QE4: $45 in Treasuries, Targets 6.5% Unemployment Rate

Update:  3 Reasons Why the Dollar Isn’t Crashing Post QE3

Update 2: Follow a live blog of Ben Bernanke’s press conference.

More points:

• There was one dissenter: the usual  Jeffrey M. Lacker.
• The Fed is aware of the inflationary dangers: price stability will be taken into account.
• The statement does acknowledge the improvement in housing, but says it came from low levels.
• Operation Twist to continue until the end of the year.
• The goal is to lower interest rates, support mortgage markets and “make broader financial conditions more accommodative”
• The interest rate remains unchanged, as expected.

Here is the critical part in the  statement:

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.

— Updates coming —

Background

The market was pricing in more quantitative easing, either in the form of an open ended program or a fixed program similar to QE2. However, there was speculation that the Fed will settle for the extension of the guidance regarding the interest rates. See the preview for more details.

The statement will be followed by a release of member projections at 18:00 GMT and by a press conference by Ben Bernanke at 18:15.

Gold likes the announcement. For more on gold and oil, see Trading NRG