Fed Launches “QE4” and Unemployment Rate Threshold, Gold Jumps

The Federal Reserve decided to expand the size of its quantitative easing program in a manner that is being characterized by many investors as the fourth round of quantitative easing (QE4).  The asset purchase increase will begin once Operation Twist concludes at the end of 2012.

The U.S. central bank announced that in order to replace the $45 billion per month “maturity extension program,” it will begin purchasing an equivalent amount of U.S. Treasuries.  Coupled with the $40 billion in mortgage-backed securities being bought, the total size of QE will rise to $85 billion per month in unsterilized purchases.

(For more analysis of QE4′s impact on gold and silver prices, go to GoldAlert Pro at http://pro.goldalert.com)

The Fed’s balance sheet expansion was largely expected by the markets and most economists, although other aspects of its policy statement came as somewhat of a surprise.  Most notably, the Fed changed the conditions under which it will leave the Fed Funds rate near the zero-bound – from a time-based approach to a threshold-based one.

In particular, the Fed removed the mid-2015 timeframe and replaced it by saying that “the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

The new approach was first proposed by Chicago Fed President Charles Evans, considered to one of the most dovish U.S. central bankers alongside Chairman Bernanke.

As has been the case throughout 2012, Richmond Fed President Jeffrey Lacker cast the only dissenting vote on the Federal Open Market Committee (FOMC).  Mr. Lacker “opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

Following the Fed’s announcement, gold futures on the COMEX jumped by 0.9% from near $1,710 to as high as $1,725 per ounce.  Silver futures posted larger gains, climbing by 2.0% from near $33.20 to an intra-day high so far of $33.87 per ounce.

The rally in precious metals was fueled in part by a sell-off in the U.S. Dollar Index, which fell by 0.4% to 79.749.

The full version of the FOMC statement is available at http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm