Federal Reserve Extends ‘Twist’ Program to Drive Rates Lower
The Federal Reserve is extending a program designed to drive down long-term U.S. interest rates to spur borrowing and spending.
Hiring has weakened, and the U.S. economy needs more support, the Fed said Wednesday. It 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 announced its action in a statement after a two-day policy meeting.
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.
The interest rates, or yields, on long-term Treasury debt dipped as traders anticipated that the Fed will buy more Treasurys. The yield on the 10-year Treasury note dropped to 1.64 percent from 1.66 percent just before the Fed’s statement. Bond yields and prices move in opposite directions.
Stock prices fell briefly after the Fed’s announcement, then rose slightly afterward.
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.
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.
(Copyright 2012 by The Associated Press. All Rights Reserved.)