Tags: fed | twist | economy

Fed Extends 'Twist' in Renewed Bid to Spark Economy

Wednesday, 20 Jun 2012 12:34 PM

The Federal Reserve on Wednesday moved to buttress a U.S. economic recovery at risk of stalling, extending a program to lower borrowing costs by selling short-term bonds and buying longer-dated ones.

Expressing concern about strains in global financial markets emanating from Europe, the Fed said it would expand its so-called "Operation Twist" program by swapping $267 billion in U.S Treasury securities by the end of 2012. The program was set to end this month.

"This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative," the Fed said in a statement after a two-day meeting.

The announcement met with a mixed reaction in financial markets. U.S. stocks fell briefly but then recovered and bounced between small losses and modest gains, while bond prices briefly rose. The dollar fell against the euro and rose against the yen.

"This is a small step. This is probably the least of their unconventional easing tools that they could have used," said Ethan Harris, North American economist for Bank of America/Merrill Lynch in New York.

Hiring by U.S. employers has slowed sharply, factory output has slipped and consumer confidence has eroded. Europe's festering debt crisis and the prospect of planned U.S. tax hikes and government spending cuts weigh on the outlook.

The economy grew at only a 1.9 percent annual rate in the first quarter, and the Fed said it expected moderate growth in coming quarters before picking up "very gradually" — a slightly more downbeat assessment than after its last meeting in April.

Policymakers at the central bank said they expect the unemployment rate, which ticked up to 8.2 percent in May, would come down "only slowly." In April, they said they expected it to "decline gradually."

The Fed, which has held overnight interest rates near zero since December 2008, reiterated its expectation that rates would stay "exceptionally low" through at least last 2014.

Richmond Federal Reserve Bank President Jeffrey Lacker, who has dissented at every meeting this year, voted against the action, saying he opposed the extension of Twist.

The Fed said that for the duration of the extended program, it would stop reinvesting the proceeds from maturing Treasuries in its portfolio, a step analysts said was likely taken to ensure the central bank had ample securities to shuffle around.

RESERVE FIREPOWER

After expanding its balance sheet by purchasing $2.3 trillion in government and mortgage-related bonds since late-2008, the Fed launched "Operation Twist" last year with a pledge to swap $400 billion in securities.

Fed Vice Chair Janet Yellen earlier this month had argued further action might make sense to "insure" against downside risks given a sharp slowdown in hiring by U.S. employers and an escalating debt crisis in Europe.

Some economists continue to expect the central bank to eventually launch another round of outright asset purchases given the heightened risks facing the economic recovery.

"They appear to be holding more firepower in reserve in case things get worse," said Allen Sinai, chief executive officer at Decision Economics in New York.

Even though Greek voters over the weekend supported candidates who back taking painful steps to stay in the euro currency union, Europe's debt crisis remains a threat to the global economy and many central banks are warily eyeing economic conditions.

Minutes from meetings of the Bank of Japan and Bank of England released on Wednesday suggest officials are poised to ease policy again. China cut benchmark rates on June 7, while the European Central Bank could take action at its July 5 meeting.

© 2017 Thomson/Reuters. All rights reserved.

 
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2012-34-20
Wednesday, 20 Jun 2012 12:34 PM
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