It will keep rates low at least through mid-2015 and start buying $40 billion in mortgage bonds a month. Stocks rally in response. Crude briefly stops $98 on Middle East worries.
The Federal Reserve announced today it will engage in a new round of economic stimulus because it fears the economy will stall without assistance.
The plan includes a promise that interest rates will remain at "exceptionally low levels" until mid-2015. Plus, the Fed said it will also buy at least $40 billion a month in mortgage-backed securities to ensure that rates do, in fact, stay low. The bond-buying program the Fed's third round of so-called Quantitative Easing, or QE.
The idea is that low interest rates, ultimately, will lead to more job creation and a stronger economy. To get there means tolerating more inflation that the 2%-a-year rate the Fed says it regards as optimal. A bit more inflation is a signal that companies are willing to invest in new ventures and add jobs.
Stocks were higher ahead of the Fed decision and moved up slightly afterward. The rally was helped by Apple (AAPL +1.57%), up $9.71 to $679.50 as Wall Street analysts fell over each other upgrading the stock. There was a touch of glumness when stocks opened because jobless claims jumped 15,000 to a seasonally adjusted 382,000, in part because of an workers affected by Hurricane Isaac.
At 12:38 p.m. ET, the Dow Jones industrials ($INDU +0.74%) were up 52 points to 13,385. The Standard & Poor's 500 Index ($INX +0.77%) had gained 5 points to 1,441. The Nasdaq Composite Index ($COMPX +0.77%) had added 11 points to 3,126.
The Nasdaq-100 Index ($NDX +0.87%), heavily influenced by Apple, had gained 14 points to 2,805.
The Fed's Federal Open Market Committee agreed to keep its federal funds rate -- what banks charge each other for overnight loans -- at 0% to 0.25%. The fed funds rate will probably hold through 2015. It said low rates would be in place through 2014.
On top of that was the quantitative easing program, which will start with the Fed buying $50 billion in securities. But the program will be open-ended, meaning the Fed could continue to buy securities until the economy is strong enough to stop.
The Fed's decisions mean this: If you can qualify for a 30-year mortgage, it will costs you 3.6% or so, and those rates will remain in place for some time. If you can qualify for a 4-year auto loan, it will cost you 3.5%.
It also means that savers will earn very little on their money. To earn more will require accepting more risk, which means higher-yielding assets like bonds, bond funds or stocks.
The decision was not unanimous. Jeffrey Lacker, president of the Richmond Federal Reserve Bank, opposed the decision.
A slow economy is the catalyst
The catalyst, of course, was the economic recovery that's tepid at best. That was seen in today's jobless claims report. The Labor Department estimated that 382,000 people filed for unemployment insurance last week, up from 367,000 the week before. The 4-week moving average, which smooths out the trend, was 375,000, up for a fourth straight week.
Last week, the Labor Department said only 96,000 jobs were created in August, although the unemployment rate fell to 8.1%. Between March and August, the economy added only 97,000 jobs a month. Between September and February, the monthly average was 205,000.ti
Crude oil (-CL) jumped nearly to $99 early today as markets reacted to the violence in Libya that claimed the life of U.S. Ambassador Christopher Stevens and three other Americans. But the price has fallen back to $97.17 a barrrel, up 16 cents. Brent crude, however, was up 49 cents to $116.49 a barrel.
Brent is the biggest influence on gasoline prices. The national average price of gasoline was up 2.6 cents to $3.869 a gallon, according to AAA's Daily Fuel Gauge Report.
Gold, meanwhile, was off $5.40 to $1,728.30 an ounce. The 10-year Treasury yield was 1.725%, down from 1.765% on Wednesday. The dollar was weaker against major currencies.
Will Apple hit $1,000?
Apple shares were up because of the iPhone excitement. The new device features a bigger screen and access to the fastest wireless networks.
Plus, the new model ships on September 21 in the United States, Australia, Canada, France, Germany, Hong Kong, Japan, Singapore and Britain, and will hit 100 countries by the end of the year in the fastest international rollout for an iPhone so far.
Analysts raised forecasts for Apple's share price by as much as $200 to between $750 and $1,000.
Meanwhile, Northrop Grumman (NOC -2.27%) fell $2.05 to $65.88, the fith-biggest drop in the S&P 500. Revenue and margins at the maker of Global Hawk surveillance drones may decline more than other large defense companies as the U.S. makes budget cuts, according to UBS analyst David Strauss.
Nike (NKE -1.78%) slid 2% to $98.86. Citigroup analyst Kate McShane cut her recommendation on the stock from buy to neutral, citing valuation and the potential for deceleration of future orders because of a slowing global economy.
Pall (PLL +7.96%) rallied $4.47 to $62.27 after the supplier of filters for drugmakers and refineries said pro forma earnings from continuing operations in the fourth quarter was 86 cents a share, exceeding the average analyst estimate of 77 cents.
