FOMC Announced QE3 and Low Rates Until mid-2015

The FOMC concluded its sixth meeting this year and as the market had anticipated, the Fed announced it will launch QE3 that will consist of purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Fed also announced it will keep the short term rates unchanged and low at least until mid-2015. Currently gold and silver prices are rising.

Following the speech of Bernanke and the minutes of recent FOMC meeting, it seems that the market has already concluded that there will be another QE program to be announced in this FOMC meeting.

From FOMC the statement:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. “

This means that the Fed is concerned of the low growth in the U.S economy and thus decided to introduce an additional quantitative easing plan.  This decision will be in addition to the FOMC’s decision to extend its operation twist throughout the rest of the year.

Not all FOMC members were on board with this decision – FOMC member Jeffrey M. Lacker opposed this decision.

The FOMC referred to the slowdown in the progress of the U.S. economy; the recent non-farm employment report didn’t show much growth (only 96k added jobs); the U.S GDP grew by only 1.7% during Q2 2012; manufacturing sectors continue to  contract.

Last month, the U.S. core inflation rose by annual rate of 2.1% (for the core CPI). This isn’t something that should bother the FOMC for the near future. The FOMC is still anticipating the inflation will remain below the 2% rate during the year. The FOMC extended its pledge of the low interest rates at 0 to 0.25% at least until the mid of 2015.

The table below shows the bullion markets’ reactions to the news of the FOMC during 2012. As seen, in the last two out of three FOMC meeting bullion rates tumbled down the next day. This time, however this decision is more likely to pull up the prices of gold and silver.

Gold Silver and FOMC statment August 2

Currently gold and silver prices and Euro/USD are rising:

Euros to US dollar exchange rate is currently traded up at 1.2921 a 0.16% gain as of 17:44*.

Current gold price, short term futures (October 2012 delivery) is traded at $1,746.0 per t oz. a $12.3 increase as of 17:44*.

(* GMT)

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