Fed Finally Announces QE3 and It's a Big One

Laura Joszt

The Federal Reserve is so unhappy with the slow growth of the economy that not only did it finally announce the long-awaited third round of quantitative easing, but it didn't set any end date for the program.

The Federal Reserve is also pretty unhappy with the pace of economic activity, so it launched an aggressive stimulus program on Thursday. The markets finally got the quantitative easing (QE) they had been waiting for and the Dow jumped by 89 points in half an hour.

The Fed announced it will buy $40 billion of mortgages per month to support stronger economic recovery, especially in the real estate market. And the Fed hasn’t set an end date for this stimulus program. Fed Chairman Ben Bernanke explained the decision for QE3 in an afternoon press conference.

QE increases the money supply by putting money into financial institutions in a bid to encourage more lending and liquidity. Investors have been wondering for a year if the FOMC would agree to a third round of QE.

“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 Federal Open Market Committee (FOMC) said in a statement.

With the unemployment rate remaining above 8% and a slowly rebounding real estate market (with plenty of areas still showing high numbers of underwater houses), the Fed is clearly unhappy with the current state of the U.S. economy.

The Fed also announced that it will be keeping its guidance for low rates through mid-2015, at least.

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” the FOMC wrote in a statement.

The timing of the decision is interesting, to say the least. The Fed is supposed to politically independent, and yet this move is coming at a time when the election is less than two months away. And Republican nominee Mitt Romney has questioned the likely effectiveness of unorthodox monetary policy, according to Reuters.

The previous two rounds of QE had uneven effects, although conservatives have been critical, according to CNBC. While inflation has remained mostly tame, the U.S. has seen increased food and energy prices.

Read more:

Fed's press release

Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates - CNBC

Fed Launches Big Stimulus, to Buy Bonds Until Jobs Recover - Reuters