Markets Surge As Federal Reserve Offers New Stimulus

On Thursday, the Federal Reserve announced its third round of quantitative easing — in other words, a slew of asset purchases focused on the housing market, with the goal of easing unemployment and speeding up the economic recovery. The Fed will buy $40 billion in mortgage-backed securities each month for an indefinite period of time, until it is confident the outlook for the labor market has improved.

The statement from the Fed expresses dissatisfaction at the current rate of economic growth, and the need for proactive action:

Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.

With interest rates already at their lowest level —the “zero bound” — the Fed has resolved to take on a more active role in boosting the economic recovery. In buying up assets such as mortgage-backed securities from banks, the Fed is injecting money into the US economy, and keeping interest-rates low in the long-term.

Together with the $40 billion a month to support mortgages, the Federal Open Market Committee (FOMC) is extending its 2011 Operation Twist program—an initiative of buying long-term Treasuries and simultaneously selling a portion of its short-term issues—which will total $85 billion a month in new assets.

“One of the main concerns that firms have is that there is not enough demand, people coming and demanding their products,” Federal Chairman Ben Bernanke said at a news conference in Washington. “If people feel their financial situation is better because their 401(k) is better, or their house is worth more, they’re more willing to go out and spend, and that’s going to provide the demand firms need to be able to hire and invest”

Bernanke reassured investors that he “would not accept the proposition that the Fed is out of ammunition. Our tools,” he continued,”while non-standard, still can create more accommodative financial conditions, can still provide support for the economy, can still help us to return to a more normal economic situation.”

The latest move from the Fed will be instrumental in restoring confidence in the marketplace. Already the markets have reacted positively, with the Dow Jones and the S&P 500 already at levels higher than in December 2007 and early 2008, respectively. The Dow surged 1.4% to 13,523.77, and the S&P 500 rallied 1.6% to 1,459.09. The Nasdaq increased 1.4% to 3,157.68.


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