In an unprecedented step, the Fed’s policymaking panel launched another aggressive economic stimulus program today by saying it will buy $40 billion of mortgage-backed securities per month until the outlook for jobs improves – and as long as inflation remains contained.

The new purchases combined with the continuation of “Operation Twist” will increase the Fed’s buying appetite by about $85 billion per month through at least the end of the year. In the Fed’s first two rounds of economic stimulus, dubbed QE1 and QE2, the Fed had a buying appetite of around $100 billion per month.

The latest purchases build on the $2.3 trillion in Treasury debt obligations and mortgage-backed securities the Fed has already bought.

In an additional move, central bankers said they are not likely to raise their benchmark short-term interest rates from current rock-bottom lows until late 2014.

There is quite a party going on as the mortgage market is experiencing a “moon-shot” rally as I write. Stocks are rallying too — but Treasury debt prices remain soft.

The current rally may be more than the “head fake” and one needs to accept the idea that things may be different this time around – but our experience continues to push us into bearing in mind the historical fact that QE1 and QE2 each produced at least a 600 basis-point swoon in mortgage market over the six months following their launch.

One day does not a trend make – but more than a 100 basis-point single-day rally is certainly a nice start. Let’s see what follow-through trading is like over the next two days or so before we get out our party hats out and start dancing in the street.

Stay Tuned!

Mortgage Rates as of September 13, 2012 ( purchase transactions )

30 day rate locks, subject to credit score and loan to value edits

FHA

30 year fixed 3.25% 0% origination fee

Conventional

30 year fixed rate 3.375% (*LTV and credit score could impact this quote)

15 year fixed rate 2.75%

5/1 ARM 2.375%

7/1 ARM 2.75%