THE US Federal Reserve has launched an open-ended effort to spark recovery by injecting an additional $40 billion into the economy each month through purchases of mortgage-backed securities.

Unlike previous programmes, the Fed’s third round of quantitative easing – nicknamed QE3 – does not have a defined limit and will continue until the labour market improves. Combined with its existing purchases of long-dated Treasuries under its Operation Twist programme, the Fed will be buying assets at a pace of $85 billion a month for the rest of the year, a similar pace to its QE2 programme during 2010.

Most markets reacted positively to the Fed announcement, with stocks on Wall Street jumping more than 1 per cent.

Gains in the SP 500 pushed the broadest measure of US stocks above its highest close since 2007. In contrast, longer-dated US Treasuries fell, pushing the yield on the 30-year bond above the 3 per cent mark.

The new QE programme marks one of the most significant shifts by the Fed since the 2008-09 financial crisis. The Fed has for the first time tied policy to developments in the economy – and promised not to shift policy until it succeeds.

“If the outlook for the labour market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the rate-setting Federal Open Market Committee said.

Asset purchases will continue automatically if unemployment remains high, providing a prop to financial markets and the economy. That insurance policy should encourage consumers to spend and investors to put their money to work.

The move marks a decisive exercise of authority by Ben Bernanke, the Fed chairman whose term ends in 2014, but could pose a difficult challenge for a successor. – (Financial Times Limited)