Fed Announces QE3

The Federal Reserve announced a third phase of quantitative easing this evening in an effort to speed US economic growth and improve hiring.

In the culmination of a two day FOMC meeting, Ben Bernanke announced that the Fed will expand its purchases of long term securities to the tune of $40bn per month on a move that had no expiry date i.e. open ended. The Fed also said that if the labour market does not improve substantially, they will continue to purchases mortgage backed securities (MBS) as well as undertake additional asset purchases and employ other tools that may be appropriate.

Essentially the Fed delivered on what much of the market had been hoping for in the last two months, an increase in asset purchases and openly admitting that they may increase the aggressiveness of the scale of purchases if the US labour market does not improve. The Fed also left interest rates at zero to at least through mid-2015, an extension of one year of previous pledges.

The immediate reaction in equity markets was bullish. The Dow Jones immediately rallied as a knee jerk reaction alongside that of Gold whilst the US dollar saw pressure.

The key now will be whether the equity moves we have seen has long term motivations. The traditional buy the rumour sell the fact scenario is still a danger but the key line for me is the fact whilst the Fed has immediately increased asset purchases – this starts tomorrow – they have also left the door open for more purchases if the labour market does not improve. One issue is that we don’t know the scales that would dictate further action?

All eyes now on the Bernanke press conference as the Fed Chairman attempts to explain the rationale behind these moves and spells out the fine print as to what conditions would dictate further action or indeed a postponement of the additional measures announced today.