QE3 Is on the Way
After months of speculation and anticipation, the Federal Open Market Committee decided to undertake a third round of quantitative easing. The centerpiece of QE will be the purchase of more mortgage-backed securities at a pace of $40 billion per month. The FOMC also says that economic conditions are likely to warrant that the federal funds rate remain at exceptionally low levels through at least mid-2015 (previously they had say through 2014). In addition, the FOMC will continue "Operation Twist" -- in which they sell short-term T-bills in exchange for longer-term bonds -- through the end of the year and will continue to reinvest principal from holdings that have matured back into mortgage-backed securities.
The FOMC said that these moves combined would result in an $85 billion per month increase in the Federal Reserve's holdings of longer-term securities. For context, QE2 involved the purchase of long-term Treasury bonds over about an eight-month stretch at a rate of roughly $100 billion per month. However, unlike QE2, the FOMC has declined to put an end date on the new purchases. Furthermore, whereas the focus of QE2 was on Treasury bonds, QE3 will focus on MBSs to try to remedy the housing market, which is finally starting to show signs of recovery. Overall, QE3 would represent the largest purchase of MBSs since the initial round that took place from 2009 through early 2010.
Source: Federal Reserve
Markets clearly liked the FOMC's announcement, as the Dow Jones went up by over 200 points in the two hours after the news came out.
The size of the Fed's balance sheet, which is unsurprisingly well above pre-crisis levels, currently sits at $2.8 trillion and will likely surpass $3 trillion in the next few months. Below is a chart from Stimulus.org showing the composition of the Fed's balance sheet since the crisis began.
Source: Cleveland Federal Reserve
Interestingly, from a fiscal perspective, the CBO appeared to factor in QE3 into its August baseline. In discussing changes in their revenue projections, they said, "Relative to its projection in March, CBO projects that the Federal Reserve will purchase and hold more interest-earning assets so as to push interest rates lower. That revision boosts estimates of Federal Reserve remittances by a total of about $100 billion over the 2013–2022 period."
So the FOMC has lived up to CBO's expectations. The much more important question is whether QE3 will be able to boost the economy.
To see everything else the Fed has done to support the economy since 2008, visit Stimulus.org.