Fed Takes Action: $40B Bond Buys Monthly; Near-Zero Rate 'Thru Mid-2015'

The Federal Reserve’s policy-making committee said today it will purchase $40 billion a month in mortgage-backed securities and pledged to hold its key federal funds interest rate at “0-.25 percent” through mid-2015.
The new round of monetary stimulus is intended to spur job growth following last week’s disappointing unemployment report, which saw the jobless rate fall to 8.1 percent from 8.3 percent only because more people left the work force entirely.
The Fed action should continue to put downward pressure on longer-term interest rates and support the mortgage markets, creating sustained home-buying affordability for millions of Americans.
It should also bolster mortgage refinancing, which has already seen a surge from government-sponsored programs aimed at helping “underwater” borrowers whose homes are in negative equity.
“The (Federal Open Market) Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Fed said in a statement today.
This third round of bond purchase was widely expected by the markets, but is certain to draw strong criticism from Republicans who see the Central Bank as overstepping its mandate of spurring job growth and curtailing inflation.
Dubbed “QE3” or “quantitative easing,” the Fed’s latest move will increase its holdings of longer-term securities by about $85 billion each month through the end of the year. But unlike previous QEs, this one is open-ended.
The Fed also will continue its program announced in June to extend the average maturity of its securities, and is maintaining its policy of reinvesting principal payments from its debt holdings in mortgage-backed securities.
“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 Fed said.
The benchmark federal funds rate has been at “near zero” since the aftermath of the financial crisis. The Fed today extended is previous posture of holding the key short-term rate through late 2014.
The 0-.25 rate is now “likely to be warranted at least through mid-2015.”
Banks use the target funds rate set by the central bank as a benchmark for setting interest rates for prime loan customers.

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