Fed expands Operation Twist

Washington: The Federal Reserve will expand its programme to replace short-term bonds with longer-term debt by $267 billion through the end of the year in a bid to reduce unemployment and protect the expansion.

The continuation of Operation Twist should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative, the Federal Open Market Committee said on Wednesday in a statement at the conclusion of a two-day meeting in Washington. Stocks and Treasury yields dropped after the statement.

“Growth in employment has slowed in recent months, and the unemployment rate remains elevated,” FOMC said. “Household spending appears to be rising at a somewhat slower pace than earlier in the year.”

Policymakers led by chairman Ben S. Bernanke are taking steps to shore up the world’s largest economy as faltering growth leaves it vulnerable to fallout from the European debt crisis and looming fiscal tightening in the US. Payrolls expanded at the slowest pace in a year in May, and the jobless rate has been stuck above 8% since February 2009.

The yield on the 10-year Treasury note fell to 1.63% at 12.35pm in New York from as high as 1.68% earlier on Wednesday. The Standard & Poor’s 500 Index fell 0.7% to 1,349.18.

Policymakers left unchanged their view that economic conditions will probably warrant keeping interest rates exceptionally low at least through late 2014. FOMC has kept the main interest rate in a range of zero to 0.25% since December 2008.

The Fed said it is prepared to take further action as appropriate to promote a stronger economic recovery and sustain improvement in labour market conditions in a context of price stability.

The Fed said on Wednesday it would sell Treasury securities with remaining maturities of about three years or less. It will purchase securities with six years to 30 years remaining.

The existing maturity extension programme, known as Operation Twist, was announced in September and expires this month. Under that programme, the Fed is selling $400 billion of short-term government debt and replacing it with the same amount of longer-term Treasuries. The Fed left unchanged its policy of reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities.

Inflation has declined, mainly reflecting lower prices of crude and gasoline, and longer-term inflation expectations have remained stable, the Fed said on Wednesday. Oil prices have slumped 23% to $84.03 a barrel on Tuesday since reaching a high of $109.77 a barrel in February.

Richmond Fed President Jeffrey Lacker dissented for the fourth meeting in a row, saying he doesn’t support extending Operation Twist. He said last month he believes the central bank will probably need to raise the main interest rate next year.

It was the first meeting for governors Jeremy Stein and Jerome Powell, who joined the Fed last month, raising the Washington-based board to its full, seven-member strength for the first time since 2006.