Fed prepares to print $780 billion a year in open-ended stimulus

The Federal Reserve is likely to announce new open-ended stimulus measures tomorrow, that will amount to $780 billion a year.

According to a group of economists surveyed by Bloomberg, the new quantitative easing programme (QE3) will be used to purchase around $30 billion in government debt and $35 billion in housing debt each month, meaning that after a year the Fed would expand its balance sheet by a total of $780 billion.

The US central bank is concerned about slowing economic growth and an unemployment rate which has been stuck above 8% for 43 months in a row. And it’s clear from Fed chairman Ben Bernanke’s speech at Jackson Hole last month that the Fed believes that its first two rounds of QE did provide a boost to the US economy and employment rate.

San Francisco Fed President John Williams, Chicago’s Charles Evans and Boston’s Eric Rosengren have all called for open- ended asset purchases.

The Federal Open Market Committee (FOMC) will begin its two-day meeting today, and a statement from the group is expected at around 12:30pm EDT tomorrow.

In addition to its expected announcement of more QE, the Fed is likely to provide further guidance on the duration of its zero-interest-rate policy (ZIRP). Rather than a fixed date at which rates may rise (currently late 2014), this too may become open-ended.

According to Citigroup a gauge of indicators of market expectations for additional central bank stimulus rose to a record 99% last month. The measure increased to 82% in the months before QE2 in November 2010.

The bottom line

I have absolutely no doubt that more stimuli from the Fed is on its way, it’s just a question of when. Of course, if for some reason the Fed delays the announcement of further QE we can expect a big selloff in the markets tomorrow. It’s definitely time to tighten up those stops.

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