Fed extends bond program, delays further action
KEVIN G. HALL
WASHINGTON — Shrugging off financial market pleas for more action, the Federal Reserve on Wednesday extended a controversial bond-buying program designed to lower interest rates but declined to expand into new areas, even as it downgraded its forecast for employment and growth in the sluggish U.S. economy.
The rate-setting Federal Open Market Committee announced, as expected, that it would extend Operation Twist, a program in which it swaps short-term government bonds it now holds for those of longer duration. That $400 billion effort was to expire at the end of the month, and the committee decided to extend it to year’s end, swapping out another $267 billion in bonds.
In a news conference, Federal Reserve Chairman Ben Bernanke released an updated Fed forecast that downgraded the outlook offered in April. The central tendency forecast, which strips out the most optimistic and most pessimistic views, sees growth in a range of 1.9 percent to 2.4 percent this year. That’s down from the 2.4 percent to 2.9 percent projected in April.
Similarly, the Fed now sees unemployment this year in a range of 8 percent to 8.2 percent, the latter figure where it stands today. In April, the Fed forecast had projected the jobless rate to fall into a range of 7.8 percent to 8 percent.
How does the program work?
The Fed sells Treasury securities it owns that mature in less than three years and buys longer-term bonds that mature in six to 30 years.
What’s the goal?
By buying longer-term Treasurys, the Fed intends to lower longer-term rates and encourage more borrowing and spending. Lower rates could also lead more investors to shift money into stocks because they’ll receive less return on their investment in Treasury bonds.
Has it worked?
Many economists think Operation Twist has helped keep rates on mortgages and other consumer and business loans near record lows. But given how low rates already are, few think the extension will lead to much more borrowing.
Where does the name come from?
The Fed took similar steps in 1961. It first called the program Operation Nudge, because it was intended to nudge long-term interest rates lower. But at the time, Chubby Checker’s record “The Twist” was popular, and the name “Operation Twist” stuck.
The Associated Press contributed to this report.
