Fed Extends 'Twist' Program to Drive Interest Rates Lower

Fed extends 'twist' program to drive rates lowerWASHINGTON (AP) - The Federal Reserve is trying again to jolt an economy that's being held back by a weakened job market.

To spur borrowing and spending, it's extending a program designed to lower long-term U.S. interest rates.

At the end of a two-day policy meeting Wednesday, the Fed also sharply reduced its forecast for U.S. growth and said it's prepared to act further to bolster the economy. It reiterated its plan to keep short-term interest rates at record lows until at least late 2014.

"If we're not seeing a sustained improvement in the labor market, that would require additional action," Bernanke said at his quarterly news conference later in the day.

Wall Street wasn't impressed by the Fed's limited response Wednesday. Stock prices barely budged. And analysts questioned how much benefit the Fed's latest economy-boosting effort would have, in part because interest rates are already near record lows.

If the Fed's more pessimistic outlook proves accurate, President Barack Obama's chances in an election that will turn on the economy would likely suffer.

Bernanke noted that the economy is under threat from Europe's debt crisis and the prospect of sharp spending cuts and tax increases that would take effect at the end of the year without a congressional agreement.

European leaders will be seeking a breakthrough at a summit next week in Brussels. Bernanke said he's in regular touch with the head of the European Central Bank.

The Fed said in a statement around 12:30 p.m. EDT 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. Businesses and consumers who aren't borrowing now might not do so if rates slipped slightly more.

"This move is largely symbolic," said David Jones, chief economist at DMJ Advisors.

Jones estimates Operation Twist will lower long-term rates by only about one-tenth of a percentage point.

At his quarterly news conference later Wednesday, Bernanke said the Fed would consider more aggressive action, such as another bond buying program. The Fed has completed two such programs. It bought more than $2 trillion in Treasurys and mortgage-backed securities, expanding its portfolio above $2.8 trillion.

The yields on Treasury bonds finished the day only slightly below where they were before the announcement. The Dow Jones industrial average finished down about 13 points.

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."

The Fed 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.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.

Josh Feinman, global chief economist at DB Advisors, said the extension of Operation Twist allows the Fed to do something without expanding its portfolio of securities. Launching a new bond-buying program would have likely incited criticism that the Fed was escalating the long-term risks to the economy.

In part, that's because Fed would eventually find it harder to shrink its portfolio without driving interest rates back up and possibly threatening the economy.

"The downside risks have increased enough that they felt they needed to do something," Feinman said. "Extending Operation Twist was the path of least resistance."

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 a 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.

Economists also 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.

One positive trend is that U.S. inflation is low. Core consumer prices, which exclude volatile food and energy costs, have risen just 2.3 percent over the past 12 months. That's near 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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23 Comments

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Fred Schriever

Lowering rate will have the opposite effect they want. For esxample seniors hoping to supplement their income with the interest from CD's are already cutting back on their spending and putting off retirement due to low interest rates. Instead raising interest rates a little might actually help the economy by opening up jobs and making people feel better about their future.

June 23 2012 at 11:48 AM Report abuse rate up rate down Reply
nsoccio

Trevor You are right. At one time interest rates were set by markets, with QE 1, QE 2 & Operation Twist, all orchestrated by Ben Bernanke & his puppet board of Governor's set to drive interest rates down as low as they can is WRONG & CRIMINAL.,. The process is only to help the big investments banks to recieve free $ from the Goverment & Rip Off the American People with 31% Credit Card Rate and anywhere from 8% to 15% on delinquent & late payments on Student Loans another Criminal Act. The are 2 Govenors on the Federal Reserve Board 1 in Philadelphia & Paul Fisher of the Dallas Federal Reserve bank who were dead set against lowering Rates back in August 07 when this fiasco all began.

June 23 2012 at 11:24 AM Report abuse +1 rate up rate down Reply
nsoccio

Very, Very sad I can't believe helocopter Ben Bernanke could possibly be that for out of touch with reality. He started lowering interest rates in Aug of 07, by Dec of 08 he accomplished lowering rates to 3% Prime & 0% overnite rate. The lowest they've been in the history of this country. Well how we all doing LOL, a 3rd grader knows theres inflation out there. Low, Deplorable, interest rates have done nothing to spur the economy only made the big banks & all there CEO'S FAT. The retires, & people looking to retire are doomed. Remember Bernanke is on a fixed salary & fixed pension, interest rates don't affect him at all. Don't forget he could give a **** less about the American people only his big banker friends & the President who employs him. If Romney gets elected Bernanke is TOAST. DON"T FORGET THAT IN NOVEMBER.

June 22 2012 at 4:57 PM Report abuse +3 rate up rate down Reply
n5monthsocrapleft

THE MUSLIM CLOWN TANKED OUR ECONOMY N DROVE AMERICA INTO ECONOMIC DISASTER N THERE IS NO "HOPE" N NOTHING IS GOING TO "CHANGE" UNTILL THIS MUSLIM CLOWN IS REMOVED FROM OUR WHITE HOUSE IN HANDCUFFS ,HOW MANY TIMES DO WE HAVE TO TELL YOU.! ? ? ?

June 22 2012 at 2:41 PM Report abuse +3 rate up rate down Reply
Davie2743

The FRB is always a day late and a dollar short and repeatedly fails to exude confidence to the U.S. economy, which is an instrumental reason unemployment lingers at such high rates.

June 22 2012 at 9:28 AM Report abuse +2 rate up rate down Reply
sturso1201

banks want you to have credit card debt...they will not loan you money at 3.75% for a house. Until they start loaning money to regular people nothing is going to change. Anyone try getting a loan lately?

June 21 2012 at 3:33 PM Report abuse +1 rate up rate down Reply
1 reply to sturso1201's comment
vlady1000

The media is making it sound 10X worse than it really is,. I just refied 2 rentals (was even able to pull over $100K out), Daughter just sold her house (buyer put zero down), Niece just bought her 1st house with 10% down and no PMI, I have been approved to buy more rentals if I want, daughter is approved to buy another house after she moves and even a rental on top of that, if she wants. Yes, the rules are a little tighter, but anyone that shows they are conservative and know how to manage their money, it should not be a problem.

June 21 2012 at 11:43 PM Report abuse -1 rate up rate down Reply
2 replies to vlady1000's comment
n5monthsocrapleft

lying about the banks n economy does not do a damm thing for our economy that this muslim clown tanked ,you sound like the lying obamy camp. !

June 22 2012 at 2:34 PM Report abuse rate up rate down
vlady1000

n5Month..... why do you turn EVERYTHING into a political issue? What I said, are the facts that I and my family members have experienced in the last 6 months.

June 22 2012 at 5:11 PM Report abuse rate up rate down
chris1011

You can get high interest in the market with REITs. Bought Annaly back in '06 at $12 per share. Dividends have been steady every quarter at between 12% to 16%. Right now share price is $17.0 per and dividend yield is 13%. Where else can you get returns like that?

June 21 2012 at 3:31 PM Report abuse -2 rate up rate down Reply
1 reply to chris1011's comment
vlady1000

wow, that is a good. Right now, most rental properties are doing very well. Costs have dropped (thanks to lower rates, and lower taxes), while revenues have increased, the best of both worlds. But like anything, it will change. So keep an eye on it as there will be a time to walk away.

June 21 2012 at 11:48 PM Report abuse -2 rate up rate down Reply
2 replies to vlady1000's comment
n5monthsocrapleft

rents are there highest ever n thru the roof cause this muslim clown drove america into economic disaster what it is today. !

June 22 2012 at 2:39 PM Report abuse +1 rate up rate down
chris1011

Nickle a post imalibby and lotsacrap

June 26 2012 at 3:41 PM Report abuse rate up rate down
Jetncat

They should keep their noses out of the private sector! The Feds are screwing with the economy and Seniors are paying for this with no interest on their bank accounts. What part of money will stay on the sides lines until Obama is out of office doesn't Ben Bernanke not understand? TRILLIONS waiting for him to leave office!

June 21 2012 at 3:02 PM Report abuse +1 rate up rate down Reply
rgkarasiewicz

"Bernanke said he's in regular touch with the head of the European Central Bank." I sure don't doubt that.

June 21 2012 at 1:41 PM Report abuse rate up rate down Reply
donut999

Agree t trevor. This is one of those silly outings where everyone says "what are they doing?", so they come up with this useless program just for the sake of an answer. Where we have been on mortgage rates, even before the QE's, is a positive thing, but very few potential deals are going to be broken by the rate being 3.625 vs 3.75%. Even 4% a winner. Just ask the millions that would like to re-fi down from 5.75% but cannot do it.

June 21 2012 at 10:14 AM Report abuse rate up rate down Reply