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Fed extends ‘Twist’ program to drive rates lower

Updated: June 20, 2012 1:29PM



The Federal Reserve acted Wednesday to lift an economy that’s being held back by a weakened job market. It’s extending a program designed to spur borrowing and spending through lower long-term U.S. interest rates.

The Fed also reiterated its plan to keep short-term rates at record lows until at least late 2014. And it said it’s prepared to act further if the economy deteriorates.

The central bank noted that Europe’s debt crisis threatens the economy. Fed officials will be watching for any breakthrough during a summit of European leaders in Brussels next week.

The Fed also sharply lowered its outlook for U.S. growth. It now thinks the economy will grow no more than 2.4 percent this year. That compares with its forecast in April that the economy could grow up to 2.9 percent. And it thinks the unemployment rate, now 8.2 percent, won’t fall much further in 2012.

After a two-day meeting, the Fed announced in a statement around 11:30 a.m. Chicago time that it will continue a program called Operation Twist through year’s end. Under the program, the Fed has been selling $400 billion in short-term Treasurys since September and buying longer-term Treasurys. It said it will extend the program through December using $267 billion in securities.

But extending Operation Twist might not provide much benefit. Long-term U.S. rates have already touched record lows. Businesses and consumers who aren’t borrowing now might not do so if rates slipped slightly more.

David Jones, chief economist at DMJ Advisors, said he expected the extension of Operation Twist to have only a slight effect on long-term rates, perhaps lowering them by about one-tenth of a percentage point.

“This move is largely symbolic,” Jones said.

Investors appeared unimpressed with the Fed’s plans to help the economy through lower long-term rates. Stocks were little changed for the day, and the yields on Treasury bonds were trading about where they were before the announcement.

John Canally, investment strategist at LPL Financial, says the Fed delivered just what investors expected and offered a hint at further easing.

“If there’s another misstep somewhere — in Europe ... more weak data — the Fed’s going to do more,” Canally said.

For now, he said, the Fed wants to keep “some powder dry” in case there’s a meltdown in Europe. Canally also suggested that the Fed may be reluctant to be aggressive in an election year out of concern it could be seen as affecting the election.

But in a comment on Twitter, Justin Wolfers, an economics professor at the University of Pennsylvania’s Wharton Business School, suggested that the Fed might be on the cusp of going further.

Wolfers characterized their view as: “One more bad jobs report and we’ll do more.”

In its statement, the Fed noted that oil and gas prices have fallen. Lower prices give the Fed room to take further action without igniting inflation.

The Fed’s statement was approved on a 11-1 vote. Jeffery Lacker, president of the Richmond Regional Fed Bank, dissented for the fourth straight meeting. The statement said he opposed the continuation of Operation Twist.

The U.S. economy looks weaker than it did when the Fed last met in April. Growth was more sluggish in the first three months of the year than first estimated.

Job growth averaged only 73,000 in April and May, after average gains of 226,000 per month in the first three months of the year.

The number of people seeking unemployment benefits has risen about 5 percent in the past six weeks, and employers posted sharply fewer job openings in April compared to the previous month.

And economists worry the debt crisis in Europe is worsening, even after Greek election results increased the likelihood that Greece will stay in the euro currency alliance.

Still, U.S. inflation is tame. Core consumer prices, which exclude volatile food and energy costs, have risen just 2.3 percent over the past 12 months. That’s close to the Fed’s 2 percent target for inflation.

Critics have complained about the Fed’s efforts to boost growth over the past three years by purchasing more than $2 trillion in bonds. They say the extra money added to the banking system could ignite inflation once the economy rebounds.

This week’s Fed meeting was the first time that the Fed board has been at full strength in six years. Jeremy Stein, a Harvard economics professor, and Jerome Powell, a former private equity executive, attended their first policy meeting since being confirmed by the Senate last month.



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