US Federal Reserve Starts QE3 and promises zero interest rate to mid-2015

1. Bloomberg – The United States 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 probably 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 central bank released its economic forecasts for growth, inflation, unemployment and interest rates over the next three years. Twelve of the Fed’s 19 policy makers said interest rates should rise for the first time in 2015.

The Fed now expects the job-market outlook to improve more swiftly by 2014, with unemployment forecast to fall to 6.7 percent to 7.3 percent, compared with 7 percent to 7.7 percent in their June projections. In 2015, unemployment will fall to 6 percent to 6.8 percent.

Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts.

2. Europe Financial Crisis Currently in a Lull

CNBC – Europe’s four-year old debt crisis seems to be in remission. Dutch voters backed pro-euro parties in Wednesday’s poll, the German Constitutional Court gave the go-ahead for the region’s permanent bailout fund and the European Central Bank’s (ECB) latest bond program seems to be working, even before it’s begun.

Yields on Spanish and Italian bonds have fallen, the euro is at its strongest in four months against the dollar and European stocks are trading at their highest in almost a month.

The turnaround has been so dramatic that it’s allowed Spain, one of the most badly affected countries, to suggest that it may not need aid after all.

But according to Nicholas Spiro, managing director of Spiro Sovereign Strategy, even though the ECB bond plan is “working wonders,” it won’t prevent Spain from eventually seeking a bailout.

But Goldman analysts warned that Spain’s delay in asking for help could actually backfire, with tougher conditions imposed by the German government on a final bailout, which would worsen the crisis.

“The more the Spanish administration indulges domestic political interests and is perceived to be taking undue advantage of external support, the more explicit conditionality is likely to be demanded,” the report said.

“This is disappointing partly because it is avoidable if Spain were to accept the external support on the terms currently available,” Goldman Sachs said.

“Spain will have the opportunity in the coming weeks and months to demonstrate that it wishes to avoid these incipient risks. But we continue to believe that some of the incentives created by Mr Draghi’s preparedness to act could prove difficult to resist.”

3. CNBC – A “terrible price” will be paid for the euro zone crisis eventually, whether the European Central Bank (ECB) embarks on mass bond purchases or not, Jim Rogers, investor and co-founder of the Quantum Fund with George Soros.

Rogers, famed as a long-term commodities bull, said there was no reason to correct this stance.

“The bull market in commodities will end some day – but some day is a long way away,” he said.

“Commodities have been correcting for a while. Now everybody knows they’re throwing money into the market, and history tells you that when they do this the way to protect yourself is to own real assets whether it’s silver or rice. If the world economy gets better, I own commodities because there’s shortages developing. If it doesn’t they’re (central banks) all going to print money. It’s the wrong thing to do, but it’s all they know to do.”

4. CNBC – Italian Prime Minister Mario Monti said he is not expecting Italy to access the European Central Bank’s new bond-buying program anytime soon.

The Italian prime minister has been able to stabilize the Italian economy and markets with his programs to raise taxes and cut spending as he seeks to balance the budget and rein in debt that is some 120 percent of the country’s gross domestic product.

Monti also said he is trying hard to avoid having to institute an increase in the so-called VAT tax but is continuing to raise revenue elsewhere and make labor markets more flexible. He said he’s not considering a so-called sin tax on cigarettes and alcohol.

Unions are still fighting back on cutbacks and are asking for a cut in taxes on the extra money they receive in December. Monti said there just isn’t any money for such a move.

Italy is hoping to generate economic growth so that they won’t have to swallow more austerity.

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