WASHINGTON-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 programme designed to lower long-term US interest rates. At the end of a two-day policy meeting yesterday, the Fed also sharply reduced its forecast for US 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 labour market, that would require additional action," Bernanke said at his quarterly news conference 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 election. 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.
Bernanke noted that the US 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 pm EDT that it will continue a programme 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. It said it will extend the program through December using US$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 programmes. It bought more than US$2 trillion in Treasurys and mortgage-backed securities, expanding its portfolio above US$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 U.S. economy will grow no more than 2.4 per cent this year. That compares with its forecast in April that the economy could grow up to 2.9 per cent.
And it thinks the unemployment rate, now 8.2 per cent, 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 US 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. (AP)