Open Ended QE

"Buyin' 'em!"
--Louis Winthorpe III (Trading Places)

Today the FOMC announced QE3, although many people are already calling it 'open ended QE.' The Fed announced that it will buy $40 billion of mortgage backed securities (MBS) monthly, as well as continue its Twist program of converting short term debt holdings to longer term paper. Into year end, the FOMC forecasts $85 billion/month in additional long term debt holdings.

The Fed put no time limit on this program, stating that "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency MBS" as well as "undertake additional asset purchases, and employ other policy tools as appropriate until such improvement is achieved."

The FOMC also pushed out its zero interest rate policy (ZIRP) till mid 2015.

The Fed is essentially saying that it will move heaven and earth in a quest to reduce unemployment. It will move past Treasuries and MBS into other asset classes if necessary in order to move the needle.

If you are perplexed about how buying MBS and other asset classes could change unemployment, you are not alone. After all, Fed window rates are already close to zero, mortgage rates are at 3% or lower, and employment has not ripped higher. What could another few basis points do?

The conclusion must be that it is not about lowering rates. Instead, it seems a baldfaced (sorry Ben) attempt to jack asset prices higher thru direct purchase and pushing investors farther out on the risk curve.

As if on cue, someone from Reuters questioned Bernanke on just this issue at the post FOMC press conference. Ben's answer is that he's going for higher prices in houses and stocks to achieve a 'wealth effect.'

Can't be much plainer than that. The Fed wants to print another bubble.

position in SPX