Fed Reveals QE3

As many had expected -- and hoped -- the Federal Reserve announced this afternoon that it would begin a new round of quantitative easing. Investors reacted positively.

The Fed outlined a plan to purchase $40 billion of mortgaged-backed securities per month, this time with a new twist. The program is open-ended, allowing the Fed to continue buying up bonds until it sees a substantial improvement in the economy. It said in a statement that, "If the outlook for the labor market does not improve substantially, the [Federal Open Market] 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." 

This will go hand-in-hand with the Fed's June announcement that it will continue its "Operation Twist" until the end of the year, increasing the FOMC's holdings of long-term securities by nearly $85 billion total per month through the end of 2012.

Stocks exploded on the news, as the Dow Jones Industrial Average (INDEX: ^DJI  ) jumped to a 100-point gain on the day, with the S&P 500 rising to gains of more than 0.8%.

Skeptics sounded off before the announcement, questioning the effect of further easing with interest rates already hovering near record lows. The announcement follows two prior rounds of quantitative easing that have purchased $2 trillion in bonds since the start of the recession.

Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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