US Fed extends ‘Twist’ program to drive rates lower

By Martin Crutsinger ,AP

WASHINGTON — The Federal Reserve is trying again to jolt the American economy out of its stalled recovery. It’s extending a program that aims to encourage borrowing and spending by reducing long-term interest rates.

Wednesday’s decision followed months of concern that the economy is being held back by a weakened job market.

At the end of a two-day policy meeting, the Fed also sharply reduced its forecast for U.S. growth and said it’s prepared to take more action if necessary. It reiterated plans 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,” Fed Chairman Ben Bernanke said later in the day.

This is troubling news for President Barack Obama, whose prospects of winning re-election in November could hinge largely on the health of the economy.

Republican challenger Mitt Romney has accused Obama of failing to steer the economy out of a deep recession, setting up the health of the nation’s economy as a pivotal issue in the 2012

Wall Street wasn’t impressed by the Fed’s limited response. 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.

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 unless Congress acts.

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 it will continue a program called Operation Twist through year’s end. Under the program, the Fed has been selling US$400 billion in short-term Treasurys since September and buying longer-term Treasurys. Operation Twist was to expire at the end of June. The Fed said it will extend it using US$267 billion in securities.

But extending Operation Twist might not provide much benefit. Businesses and consumers who aren’t borrowing now aren’t that likely to change their minds just because rates dropped a little 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 US$2 trillion in Treasurys and mortgage-backed securities, expanding its portfolio above US$2.8 trillion.