About 20 minutes ago the US Federal Reserve announced the results of its latest policy meeting. By far the most significant decision was the one to buy $40 billion of mortgage backed securities each month going forward.
There is some ambiguity here because the Fed was unclear whether this commitment extended only through December or if instead it was an open-ended one. I think Bernanke will clarify this in his press conference beginning at 2:15 today New York time. If the commitment to buy $40 billion of MBS is open -ended then this should have a very, very bullish effect on the US market over the next 6-12 months and will put pressure on the dollar. On the other hand, if the purchases are scheduled to last only through December I think the Fed will have made another policy error and the US stock market will react negatively.
Added a few minutes later:
I have had a chance to read the entire statement in detail and now believe that the commitment to purchase MBS is open-ended and that the purchase program will continue until the US labor market strengthens. If such strengthening does not occur the Fed appears to be promising a further expansion in this QE program.
I cannot emphasize enough how bullish this is for the US and world stock markets. Yes, reactions will occur on the way up as other worries intervene. But the Fed's apparent commitment to QE until the economy shows marked improvement is a radical departure from its previous policy and if followed will have very positive economic effects by restoring US nominal GDP to its normal growth path. It goes without saying that the US has other long run economic problems which arise from entitlement promises which cannot be kept. But it is much easier get agreement on how to fix these problems when the economy is growing normally.