It has been on the cards for a while, but the Federal Reserve announced, yesterday, that it would embark on third round of quantitative easing. The idea is to stimulate the economy by pumping more money into it through a programme of asset purchases.
The initiative will see the purchase of some $40 billion of mortgage-backed securities on a monthly basis. The aim is to stimulate the economy and thereby ease the US jobless total by the creation of new employment opportunities as the economy picks up. The initiative is to continue indefinitely until the employment situation eases. Currently, 8.1% of the US workforce is out of work.
A statement from the Federal Reserve noted: "The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions. 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 ". Federal Reserve chairman, Ben Bernanke has had to trim the Fed’s forecast for growth this year from 2.4% (forecast in June) to 2%.
QE 3 has been welcomed by investors with markets in Asia rising: the Nikkei put on 1.8% and the Hong Kong based Hang Seng put on 2.5%. In the USA, the Dow Jones climbed by 1.6%. European markets have also opened higher by between 1.5 and 1.9%.
The policy of purchasing longer-term bonds from retail lenders and exchanging them for shorter-term bonds is set to continue until the end of the year. This policy, known as “Operation Twist” is designed to reduce the long-term borrowing costs for businesses and homeowners. The cost of this initiative is $276 billion.