FOMC Launches New Round Of Bond Buying... QE3 Arrives, Extends Low Rates To Mid-2015 (Updated)

Today wasn’t D-Day for the Federal Open Market Committee. It was QE-Day.  Ben Bernanke and the voting FOMC members of course kept rates at zero and promised to keep this ‘exceptionally low’ stance of 0.00 to 0.25% at least through mid-2015 rather than late-2014 as previously noted.  The FOMC is launching QE3 with a new round of bond buying. The FOMC sees inflation remaining under the 2% target for the medium-term, it saw unemployment as not favorable, the economy expanded at a moderate pace.

The target for QE3 is $40 billion per month over the next year.  The target is agency-backed Mortgage-Backed Securities and that purchasing is targeted at roughly $23 billion in September. Purchases are likely to be in new issues and the FOMC will announce its purchase schedule around the last day of each month. FULL FOMC STATEMENT

What was up for grabs was the stance on more quantitative easing measures, or QE3 as the street has referred to the possibility of it for months upon months.

As far as what was expected, here were some pre-FOMC opinions:

• CNBC’s report was that the Federal Reserve will deliver on QE3, but by how much is the question.
• Neel Kashkari, head of new investment initiatives at PIMCO and formerly the Assistant Secretary of the Treasury, said on Bloomberg TV this morning that he did expect Bernanke and the FOMC to announce some more QE today.
• Phil Erlanger gave his critical trading pivots to watch on the S&P 500 (NYSEMKT: SPY).
• Yahoo! Finance’s Breakout predicted an “ease a la carte” with something for everyone.
• The Street gave its own ‘how to trade the Fed’ strategy.
• Bloomberg said, “…many traders and analysts believe the Fed will extend guidance beyond 2014. There are mixed views on whether there will be an announcement of additional quantitative easing.”

As a reminder, the Federal Reserve will release its quarterly forecast between the announcement and the Bernanke press conference set to start right around 2:00 PM EST.

As far as what the investing public thinks that the market can do long-term according to Federal Reserve action, here is a snapshot of the Yahoo! Finance poll taken 20 minutes or so before the FOMC announcement:

At 12:28 PM EST the DJIA was up 15 point at 13,348 and the S&P 500 was up less than 1 point at 1,437. Update at 12:41 PM EST: The DJIA is up 75 at 13,408 and the S&P 500 is up 9.5 at $1446….

Here are the excerpts from the FOMC Statement:

….the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months.  If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

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.  In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

JON C. OGG