United States Monetary Policy

United States

Fed launches QE3

At its policy meeting on 12-13 September, the Federal Open Market Committee (FOMC) announced a new round of asset purchases - commonly dubbed quantitative easing or QE3 - aimed at stimulating economic growth, in a decision widely expected by the market. Under the scheme, the Federal Reserve will purchase USD 40 billion per month in agency mortgage-backed securities. No end date for the programme was announced; instead, asset purchases will continue until "substantial" improvement in the labour market is achieved. The Committee also decided to continue its average maturity extension programme, commonly referred to as Operation Twist, until the end of the year. Combined, the two programmes will increase the Fed's holdings of longer-term securities by about USD 85 billion each month throughout the end of the year. The Fed also left the federal funds rate within the historically-low range of 0% to 0.25% established in December 2008 but announced that it now expects it to remain at exceptionally low levels "at least through mid-2015", compared to its previous "until late 2014" pledge. In its statement, the Fed justified its decision by arguing that, without additional monetary stimulus, economic growth may not be strong enough to generate a sustained improvement in the labour market. Monetary authorities explained that growth in employment has been slow in recent months and that the unemployment rate remains elevated, while adding that the housing sector is showing some signs of improvement, albeit from a depressed level. Regarding price developments, the Fed stated that inflation has been subdued, although prices for some key commodities have increased recently, while adding that long-term inflation expectations have remained stable. According to the Committee, inflation over the medium term will likely run "at or below its 2 percent objective".


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