The Federal Reserve yesterday fired the starting gun on QE3 as it said it was ready to throw potentially unlimited firepower at the flagging US recovery.
Ben Bernanke, the Federal Reserve chairman, who trailed the move in his Jackson Hole speech two weeks ago when he expressed "grave concerns" over the stuttering US jobs market, will launch the latest burst of quantitative easing as soon as today. Rate-setters have already pumped in $2.3 trillion (£1.4 trillion) in the first two rounds of QE over the past three years.
The Federal Open Market Committee will buy up $40bn in mortgage-backed securities every month to help bank balance sheets left crippled by the nation's housing market collapse. The Fed is also extending its Operation Twist programme – which aims to bring down long-term interest rates – by $45bn a month until the end of the year.
Significantly, the Fed has set no time limit on its purchases, and is ready to do as much as it takes until the economy improves. It said: "If the outlook for the labour 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." The last $600bn programme of QE, launched in November 2010, ran for eight months.
Unlike the Bank of England, the Fed has a dual mandate to both control inflation and ensure full employment. But the latest disappointing figures for August showed US employers creating just 96,000 jobs – well below the level needed to cut the unemployment rate as well as boost the re-election chances of President Barack Obama.
The Fed's decision also comes in the wake of the OECD think-tank cutting its growth forecasts for the world's biggest economy, now expected to expand by 2.3 per cent this year instead of 2.4 per cent. At the end of this year the so-called "fiscal cliff" also looms – automatic tax hikes and spending cuts due to kick in because Democrats and Republicans failed to agree on austerity measures last year. Some analysts fear these measures could knock around $500bn off the US economy unless politicians can strike a compromise deal.
The ING Bank economist James Knightley said weak manufacturing and retail spending had also spooked the committee, as well as last week's jobs figures. He said: "The economy is losing momentum, not rebounding, hence today's action. Furthermore, worries over the 'fiscal cliff' are only going to intensify the downside growth risks, which will limit the opportunity for unemployment to come down."
The Fed's statement added: "The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions". Interest rates will also be held at their current record low of 0-0.25 per cent at least until the middle of 2015 as "a highly accommodative stance will remain appropriate for considerable time after the economic recovery strengthens", according to the committee.
Shares in New York rallied following the Fed's statement as the Dow Jones Industrial Average added more than 100 points. The news from across the Atlantic followed Germany's approval for the eurozone's €500bn (£400bn) bailout fund on Wednesday.
Jeremy Cook, chief economist at the foreign exchange company World First, said: "The key to the market reaction is that it has not been disappointed. Everything is roughly what was expected and much like the German supreme court did not scare the horses with its decision, the Fed has not done so either."