The Federal Reserve will release a highly-anticipated statement at 12:30pm today in which it is expected to announce that it will buy $45 billion a month in Treasury bonds. Fed Chairman Ben Bernanke will hold his quarterly press conference at 2:15pm to read a statement, and take questions from the press.
A recent Bloomberg survey of 49 economists showed that 48 of them believe the Fed will enact what is already being called a fourth round of quantitative easing, or QE4. QE is a stimulative approach to monetary policy, in which the central bank buys securities from financial institutions, thereby expanding the Fed's balance sheet, and infusing those institutions with cash, while also driving down the interest rate on those securities.
Previously, the Fed has enacted three rounds of quantitative easing. The chief aim of the first round was to relieve struggling institutions of their toxic mortgage-backed securities, which were in large part reliant on subprime loans. Under QE1, the Fed bought $1.7 trillion in securities, and under QE2 it purchased $600 billion in assets, including Treasurys. In September, the Fed announced that it would commence open-ended mortgage bond buys totaling $40 billion a month for an indefinite period, would keep interest rates at zero percent until at least 2015, make additional purchases if the employment picture does not improve, and in general maintain a stimulative policy for a "considerable time."
This month the Fed is also expected to end Operation Twist, whereby it exchanges short-term government debt with longer-term Treasurys.
Given the inherently weakening effect on the U.S. dollar, QE has generally been bullish for asset classes such as equities and commodities, as investors have piled out of dollars and Treasurys in an effort to find yield. However, each new round of QE has shown to have diminishing returns as far as stocks have been concerned, as this chart indicates:
Markets will be hanging on every word said in the FOMC statement and at Bernanke's press conference. As shown above, the easing actions of the European Central Bank (ECB) have helped contribute to bullishness in stocks as well, as investors have fled the Euro. In July, ECB president, mirroring his American counterpart, indicated that the ECB would do "whatever it takes" to preserve the euro.