Fed ready to launch QE3 in bid to ease economic woes

The Federal Reserve fired the starting gun on QE3 yesterday as it said it was ready to throw potentially unlimited firepower at the flagging US recovery.

Ben Bernanke, the Fed 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 (QE) as soon as today. Rate-setters have already pumped in $2.3 trillion (£1.4trn) 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.

The Fed's decision also comes in the wake of the Organisation for Economic Co-operation and Development 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 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 labour-market conditions."

Unlike the Bank of England, the Fed has a dual mandate to control inflation and ensure full employment. But just 96,000 jobs were created in August, too few to cut the unemployment rate.