The Federal Open Market Committee Thursday afternoon said it would increase its holdings of agency mortgage-backed securities by $40 billion per month in a third round of quantitative easing. The move is expected to drive down interest rates further.
The FOMC said it will continue other forms of stimulus through yearend, including the reinvestment of principal payments from the agency MBS it holds.
Combined, the moves are expected to increase the committee’s holdings of longer-term securities by $85 billion per month through the end of 2012 in an effort to put downward pressure on rates and support the U.S. mortgage market.
The committee also extended its expected timeline for keeping the target federal funds rate at 0 to 0.25% through mid-2015.
Only one committee member, Jeffrey Lacker, voted against the action, saying he opposed the asset purchases and preferred to omit the description of the time period over which exceptionally low levels of the federal funds rate are likely to be warranted.
The FOMC also reiterated what it said is a standing policy of considering the likely costs and efficacy of the purchases in determining their size, pace and composition.
The downward pressure on rates likely will affect prepayments on MBS.