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Winnipeg Free Press - PRINT EDITION

Fed moves to lift economy; 'Twist' continues

By: Martin Crutsinger

Posted: 06/21/2012 1:00 AM | Comments: 0

WASHINGTON -- The U.S. Federal Reserve acted Wednesday to lift an economy held back by a weakened job market, 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 is prepared to act further if necessary.

The Fed lowered its outlook for U.S. growth, predicting the economy will grow 2.4 per cent at most this year, compared with an April forecast of 2.9 per cent. It forecasts the current unemployment rate of 8.2 per cent won't fall much further in 2012.

After a two-day meeting, the Fed said it will continue a program called Operation Twist through year's end. Since September, it has been selling $400 billion in short-term Treasurys and buying longer-term Treasurys. It will extend the program through December using $267 billion in securities.

"This move is largely symbolic," said David Jones, chief economist at DMJ Advisors, projecting the extension of Operation Twist to have only a slight effect on long-term rates.

At his quarterly news conference Wednesday, Chairman Ben Bernanke said the Fed is open to another bond buying program if the job market doesn't improve. The Fed has completed two such programs, buying over $2 trillion in Treasury bonds and mortgage-backed securities and expanding its portfolio to over $2.8 trillion.

Investors seemed unimpressed. Stocks and Treasury bonds were largely unchanged for most of the day, and yields on Treasury bonds were unchanged. During Bernanke's news conference, stocks began falling. Late-afternoon trading saw the Dow Jones industrial average down about 86 points.

John Canally, investment strategist at LPL Financial, says the Fed delivered what investors expected and offered a hint at further easing. "If there's another misstep somewhere in Europe, the Fed's going to do more," he said.

Canally also suggested that the Fed may be reluctant to be aggressive in an election year.

Justin Wolfers, an economics professor at the University of Pennsylvania's Wharton Business School, suggested on Twitter that the Fed might be on the cusp of going further. He characterized their view as: "One more bad jobs report and we'll do more."

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 per cent in the past six weeks, and employers posted sharply fewer job openings in April compared to the previous month.

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.

-- The Associated Press

Republished from the Winnipeg Free Press print edition June 21, 2012 B4

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