Bernanke finally unveils QE3 and gold immediately reacts by going up by over $50. The Fed will purchase up to $40 billion a month of mortgage debt for as long as it takes as reported by Bloomberg. He looks to be trying to blow another housing bubble.
The Federal Reserve said it will expand its holdings of long-term securities with
open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing
as it seeks to boost growth and reduce unemployment.
Operation Twist is to continue
The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.
The Fed’s economic forecast is as follows but what happens to inflation?
The Fed now expects the job-market outlook to improve more swiftly by 2014, with unemployment forecast to fall to 6.7 percent to 7.3 percent, compared with 7 percent to 7.7 percent in their June projections. In 2015, unemployment will fall to 6 percent to 6.8 percent.
Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts. The so- called central tendency forecasts exclude the three highest and three lowest of 19 estimates.
There was some dissent about the decision.
Richmond Fed President Jeffrey Lacker dissented for the sixth consecutive meeting, saying he opposed additional asset purchases. Lacker opposed the FOMC’s June decision to extend Operation Twist through the end of the year and has said he expects interest rates will need to be raised in 2013.
ZeroHedge makes a good point about the Fed’s ability to surprise has now been removed. It has no more weapons left in its arsenal.
There is one big problem with the Fed’s announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don’t think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity
All this of course is extremely bullish for gold when coupled with Draghi’s announcement of sovereign bond purchasing and Germany’s court ruling in favour of the ESM.