The U.S. Federal Reserve on
Wednesday delivered another round of monetary stimulus and said
it was ready to do even more to help an increasingly fragile
U.S. economic recovery.
The central bank expanded its "Operation Twist" by $267
billion, meaning it will sell that amount of short-term
securities to buy longer-term ones to keep long-term borrowing
costs down. The program, which was due to expire this month,
will now run through the end of the year.
Fed Chairman Ben Bernanke, speaking at a news conference
after a two-day policy meeting, said the central bank was
concerned Europe's prolonged debt crisis was dampening U.S.
economic activity and employment.
"If we are not seeing sustained improvement in the labor
market that would require additional action," he said. "We still
do have considerable scope to do more and we are prepared to do
more."
The Fed slashed its estimates for U.S. economic growth this
year to a range of 1.9 percent to 2.4 percent, down from an
April projection of 2.4 percent to 2.9 percent. It cut forecasts
for 2013 and 2014, as well.
In addition, officials said they expect the job market to
make slower progress than they did just a couple months ago,
with the unemployment rate now seen hovering at 8 percent or
higher for the rest of this year. It stood at 8.2 percent in
May.
The Fed's announcement met with a mixed reaction in
financial markets. U.S. stocks see-sawed, with the benchmark S&P
500 index closing down slightly, while prices for most
government bonds slipped. The dollar fell against the euro and
rose against the yen.
A number of economists said the Fed was likely to eventually
launch a more aggressive program to buy bonds outright. It has
already purchased $2.3 trillion in debt in two earlier bouts of
so-called quantitative easing.
"The burden of proof may now be on the incoming data to
prove that a third round of large-scale asset purchases may not
be necessary," said Millan Mulraine, economic strategist at TD
Securities in New York.
Wall Street's top bond firms still see a 50 percent chance
the Fed will launch a third round of so-called quantitative
easing.
DOWNBEAT ASSESSMENT
Hiring by U.S. employers has slowed sharply, factory output
has slipped and consumer confidence has eroded, with Europe's
festering crisis and the prospect of planned U.S. tax hikes and
government spending cuts casting a shadow on the recovery.
The economy grew at only a 1.9 percent annual rate in the
first quarter – a pace too slow to lower unemployment – 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 late 2014. Six of the
Fed's 19 policymakers do not expect an increase until sometime
in 2015.
Richmond Federal Reserve Bank President Jeffrey Lacker, who
has dissented at every meeting this year, voted against the
decision to extend Twist.
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.
"I do think that our tools, while they are nonstandard,
still can create more accommodative financial conditions and
still provide support for the economy, can still help us return
to a more normal economic situation," he said.
Even though Greek voters on Sunday supported candidates who
back taking painful steps to stay in the euro currency union,
Europe's debt crisis remains a threat to the global economy and
many central banks are eyeing economic conditions warily.
Minutes from meetings of the Bank of Japan and Bank of
England released on Wednesday suggest officials are poised to
ease policy again. China cut benchmark rates on June 7, while
the European Central Bank could take action at its July 5
meeting.
