The Official Start of QE 3

The Federal Reserve officially announced the start of their third stimulus attempt on Thursday, prompted by a disappointing employment situation and a persistently slow economic recovery here in the United States. While the move was generally expected by economists and the markets, there are some interesting items to note in this round.

The Fed will immediately begin to buy $40 billion of mortgage-backed securities per month, and put no specific end date on this program. The previous two rounds of quantitative easing had finite durations in terms of an amount, so this round of stimulus is a strong commitment by the Fed to do what they can until the employment situation improves.

We will have to wait and see whether this third round will have a significant impact on the economy. Investors happily greeted the news, with the markets jumping substantially following the announcement. The bond buyback is meant to lower long-term interest rates, making equities a more attractive investment option. The buyback also should help the housing market through the purchase of mortgage-backed securities. Like unemployment, the housing market has been very slow to recover from the recession despite showing some signs of life in recent months.

The Fed also extended its expectations for how long the short-term interest rates will be held near zero until mid-2015. While this isn’t particularly surprising to some economists that have been predicting a similar time frame for the last year or two, it is certainly indicative of the Fed’s belief that the economic recovery can still be expected to be an even longer, more drawn-out recovery than we have already expected.

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