The Federal Reserve extended on Wednesday its monetary stimulus to the US economic recovery renewing effort to depress borrowing costs by selling short-term bonds to buy longer-dated ones.
Expressing concern about strains in global financial markets emanating from Europe, the Fed said it was extending its Operation Twist program by buying 267 billion in longer-dated securities by the end of 2012. The Fed's first Twist 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 its post-meeting statement.
The Fed added that for the duration of the new program, it would stop reinvesting the proceeds from maturing Treasuries in its portfolio.
“Specifically, the FOMC intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. 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”.
Likewise “FOMC 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. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability”.
Richmond Fed President Jeffrey Lacker, who has dissented at every meeting this year, voted against the action, saying he opposed the extension of Twist.
The Fed retained its guidance that rates were likely to stay near zero until at least late 2014.
“FMOC expects to maintain a highly accommodative stance for monetary policy, in particular, it decided to keep the target range for the federal funds rate at 0 to ¼% and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”.
The Fed stuck to its characterization of the economy as expanding moderately, but said growth in employment had slowed in recent months.
It also expressed worries about weaker consumer spending.
“The FOMC expects economic growth to remain moderate over coming quarters and then to pick up very gradually, consequently, FOMC anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.”
The US economy appears to be faltering as growth in the emerging world slows and Europe sinks deeper into its political wrangling over sovereign debt. First-quarter US GDP was recently revised down to a 1.9% annual rate from 2.2%.
At the same time, May jobs data confirmed that a weak labour market is faltering again, with only 69,000 new jobs created and the unemployment rate rising to 8.2 percent.
Heading into the Fed's meeting this week, economists were closely divided on whether the central bank would decide more monetary stimulus was needed now.
The Fed has held overnight interest rates near zero since December 2008 and has bought 2.3 trillion dollars in mortgage and government bonds in a further effort to help the economy.
Last year, it launched Operation Twist, in which the central bank sold bonds with maturities of three years or less and bought 400 billion dollars of securities with maturities of six years and longer to push longer-term interest rates lower.
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