US Fed extends stimulus measures

Thu, Jun 21, 2012, 01:00

THE US FEDERAL Reserve delivered another round of monetary stimulus yesterday and said it was ready to do even more to help a US economic recovery that looks increasingly fragile.

“We are prepared to do what is necessary. We are prepared to provide support for the economy,” Fed chairman Ben Bernanke said at a news conference after a two-day policy meeting.

The central bank expanded its “Operation Twist” by $267 billion (€211 billion), meaning it will sell short-term securities and buy long-term ones in an effort to keep borrowing costs down.

The programme, which was due to expire this month, will now run through the end of the year.

It also cut estimates for US economic growth this year to a range of 1.9 per cent to 2.4 per cent, down from an April projection of 2.4 per cent to 2.9 per cent. It cut forecasts for 2013 and 2014 as well.

In addition, Fed officials said they expect the US jobs market to make slower progress than they did just a couple months ago, with the unemployment rate now seen hovering above 8 per cent for the remainder of this year. It stood at 8.2 per cent in May.

The announcement of the extension of “Operation Twist” met with a mixed reaction in financial markets. Prices for US stocks and government bonds see-sawed. The dollar fell against the euro and rose against the yen. A number of economists said the Fed was likely to eventually launch a third round of outright bond purchases, or quantitative easing, which would expand the Fed’s holdings of assets.

“If we don’t see continued improvement in the labour market, we will be prepared to take additional steps if appropriate,” Bernanke said. “I think there should be some conviction that they are needed, but if we do come to that conviction, then we will take those additional steps.”

Hiring by US employers has slowed sharply, factory output has slipped and consumer confidence has eroded.

Europe’s debt crisis and the prospect of planned US tax hikes and government spending cuts weigh on the outlook.

The US economy grew at only a 1.9 per cent annual rate in the first quarter, and economists expect it to do little better in the second quarter.

The Fed, which has held overnight interest rates near zero since December 2008, reiterated its expectation that rates would stay “exceptionally low” through at least 2014.

Interest-rate projections from the central bank showed that six of its 19 policymakers do not expect rates to rise until sometime in 2015. In April, only four did.

Richmond Federal Reserve Bank president Jeffrey Lacker, who has dissented at every meeting this year, voted against the decision to extend “Operation Twist”.

The Fed said that for the duration of the programme, it would stop reinvesting the proceeds from maturing treasuries in its portfolio, a step analysts said was meant to ensure the central bank had ample securities to shuffle around.

After expanding its balance sheet by buying $2.3 trillion in government and mortgage-related bonds, the Fed launched the programme last year with a pledge to swap $400 billion in securities.

At his news conference, Bernanke pushed back against the notion that the Fed’s earlier bond-buying was not effective, and that the central bank was running out of policy ammunition.