To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committeeâ€s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Check out this graph from Calculated Risk:

Note that after every hint or announcement of more Fed action, the S&P came off a recent low. In some cases, that stock surge was sustained; in others, it was not sustained. Today, after the Fed announcement, stocks surged.

I don’t know if that surge will continue — I was even surprised to see such a jump today, given that the markets had largely priced in (or so I assumed) additional Fed action.

But maybe the stock increase was related to the slow improvement that now seems to have taken hold and which has led the Fed to raise its estimates of GDP and reduce its estimates of unemployment over the next couple of years. As Calculated Risk notes in tables in a great post today, the Fed now sees GDP between 3.0 and 3.8 for 2014, unemployment between 6.7% and 7.3% for 2014, and core inflation just 1.8% to 2.0% in 2014. That indicates that the Fed still does not see any imminent threat of inflation.

There are a couple of downsides to the continued policy of driving down interest rates, especially the fact that such policies hurt savers. But the strong actions today will almost certainly help boost the economy — likely more than many analysts are willing to say. That’s the gist of another post by Bill McBride at Calculated Risk this afternoon.

With the nation still so far below maximum employment and with inflation still so subdued, it’s great to see the Fed take stronger action today. The Fed’s dual mandate is to control prices and maximize employment; many Bernanke and company are now finally treating those two elements with equal concern.

The Fed has already taken other actions over the last 4 years to try to bolster the economy.

Here’s how my Armstrong colleague Nicholas Mangee explained it in a recent Savannah Morning News column:

From 2008 through 2011, the Federal Reserve embarked on a series of financial market operations to try to rejuvenate an economy grasping for air. Massive amounts of reserves were injected into the commercial banking system. These policies, known as Quantitative Easing (QE) I, and II, and Operation Twist (a term from a similar policy enacted in 1961) consisted of purchasing hundreds of billions of dollars worth of mortgage-backed securities and treasuries from major federal agencies like Fannie Mae and Freddie Mac and other financial intermediaries.

Unlike QE I and II, Operation Twist involved re-shuffling the Fedâ€s balance sheet by which short-term treasuries were sold in exchange for assets with greater maturities, such as mortgage-backed securities. These assets were bought in order to lower medium to longer-run interest rates, the only existing yields not near zero.

By purchasing the toxic assets that so many financial firms were caught holding when the music stopped on the great credit expansion of 2003 through 2007, the Fedâ€s balance sheet and bank reserves expanded to historically unprecedented levels.

From 1984 through 2008, the average amount of commercial bank reserves held with the Fed was approximately $20 billion. By the end of 2011, that amount skyrocketed to $1.53 trillion. Even though commercial banks are required to keep a portion of reserves on site with the Fed, almost all of these new injections of liquidity were excess reserves allowed to be loaned out at will.

Calculated Risk has a succinct QE Timeline in this post. He also puts those dates into this graph of the S&P 500. It speaks for itself.

And contrary to what you might be reading or hearing, the Fed’s actions over the last few years have not damaged the economy. We have not seen runaway inflation: in fact, we still need higher inflation. We have not seen investors run away from U.S. debt: the dollar is still — even increasingly — regarded as one of the world’s few safe havens.

And by not using all the tools in its toolbox, the Fed is virtually assuring that the American economy will remain weak for years, probably until the end of this decade.

For a broader but still concise summary of the Fed’s actions over the last few years, check out an April column by my Armstrong colleague Nicholas Mangee: What the Federal Reserve has (has not) done

Today’s economic projections after the latest round of Fed meetings are, in a word, dismal. They show continued growth and continued declines in unemployment — i.e., no recession — but with a growth so slow that millions of Americans will remain un- or underemployed. Many Americans already have a tenuous hold on their standing in the middle class; millions more will fall out of it if the Fed doesn’t do more.

Here are the projections in graph form that the Fed released today. There’s obviously a considerable range of uncertainty in these forecasts, in part because of the potential catastrophe in Europe and other external events, but note that the best case scenarios are weak. To a large extent, these weak forecasts are still rooted in the housing crisis, which I last discussed at length here.

From the Fed:

And those projections in table form:

So absent Fed action, the best estimates right now are for GDP growth to remain below 3% into 2014 and for the unemployment rate to stay above 7% into 2015.

The Federal Reserve has a dual mandate: to control inflation and to maximize employment. Both those goals are currently significantly below the Fed’s targets.

Check out Calculated Risk for a broader discussion and additional links. He expects QE3 to be announced on August 1.