The US stock market rose after the announcement, while very long-term US Treasury yields and the dollar declined immediately after the news broke.
At yesterday’s Federal Open Market Committee (FOMC) meeting, the bank decided to replace the expiring Operation Twist programme with a like-for-like expansion of QE3.
As Operation Twist bought $45bn of Treasury securities per month, this means the Fed will now commit $85bn a month to QE3. The purchases will continue to be focused at the very long end of the yield curve, with 27% going to Treasuries with maturities of between 20 and 30 years.
The Fed will also continue reinvesting the principal payments from its holdings of agency debt and agency mortgage-backed securities back into agency mortgage-backed securities and will resume rolling over maturing Treasury securities at auction in January.
Bernanke said: “Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”
Capital Economics chief US economist Paul Ashworth described the expansion of QE3 to $85bn a month, which was widely anticipated, as a “very aggressive approach”.
During the meeting, the FOMC also opted to tweak the framework used to signal how long it expects to keep short-term interest rates at close to zero.
The central bank will maintain rates at near-zero as long as the unemployment rates stays above 6.5% and projected inflation is expected to remain under 2.5%.
This is the first time the central bank has tied its interest rate outlook to economic thresholds, rather than fixing them to a calendar date.
Ashworth commented: “The advantage of the numerical thresholds over the fixed calendar date is that market expectations of how long rates will remain at near-zero should adjust automatically to changes in the tone of the incoming economic data.
“The problem, however, is that market expectations could over-react to every twist and turn in the data.”
