Wednesday, June 20, 2012

Fed extends monetary stimulus to US economy

The Federal Reserve extended today its monetary stimulus to a US economic recovery that looks at risk of stalling, renewing its 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.

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 central bank retained its guidance that rates were likely to stay near zero until at least 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 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 U.S. gross domestic product was recently revised down to a 1.9 percent annual rate from 2.2 percent.

At the same time, May jobs data confirmed that a weak labor 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 decided more monetary stimulus was needed now.

The Fed has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion 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 of securities with maturities of six years and longer to push longer-term interest rates lower.