Fed Undertakes QE3 With $40 Billion in MBS Purchases a Month

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“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,” the Federal Open Market Committee said today in a statement at the end of a two-day meeting in Washington.

The FOMC said it would likely hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Chairman Ben S. Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he has called a “grave concern.” The decision risks provoking a renewed backlash from Republicans, including presidential nominee Mitt Romney, who say Bernanke’s policies threaten to ignite inflation while doing little to spur the economy.

The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.

Stocks, Treasuries

Stocks soared after the statement. The Standard & Poor’s 500 Index rose 0.7 percent to 1,446.57 at 12:48 p.m. in New York. The yield on the 10-year Treasury note rose to 1.81 percent from as low as 1.71 percent.