Federal Reserve acts to revive ailing recovery
Annalyn Censky, CNNMoney
NEW YORK (CNNMoney) – The Federal Reserve launched another $267 billion program on Wednesday that it hopes will revive the ailing recovery.
An extension of its current policy nicknamed Operation Twist, the program swaps short-term bonds for ones with longer durations.
The move is designed to lower long-term interest rates on everything from mortgages to business loans and spark borrowing, but without pumping more money into the economy.
The Fed’s current round of Operation Twist swapped $400 billion in short-term Treasuries for longer-term bonds. Started in October, it was originally set to end on June 30.
The extended program will continue through the end of the year.
Given weak economic data lately, the announcement didn’t come as a complete surprise. A CNNMoney survey of economists had predicted the Fed would act to extend the program.
Inflation is near the Fed’s target, but the unemployment rate, at 8.2% is far above acceptable levels. Meanwhile, the most recent jobs report showed American employers added 69,000 jobs in May, the weakest hiring in a year.
Stocks fell slightly following the news.
The Federal Reserve has kept interest rates at historic lows since December 2008, as a way to free up credit following the financial crisis.
To push rates even lower, the central bank has also purchased more than $2 trillion in assets in two rounds of so-called quantitative easing, or QE.
The effect on Main Street has been questionable though. Mortgage rates are at record lows, but even so, new home sales have been choppy and banks are still unwilling to lend to anyone with less-than-perfect credit. Small business owners are also struggling to get loans.
Fed policymakers voted Wednesday to keep interest rates “exceptionally low” for at least another two years, indicating they believe the economy will remain weak enough to warrant an extra boost “at least through late 2014.”
Of the Fed’s 12 voting members, Richmond Fed President Jeffrey Lacker was the only one to oppose the decision.
Later in the day, the Fed also released updated forecasts, showing the central bank has lower expectations for the economy this year.
In a press conference, Bernanke also told reporters that he stands ready to do more.
“In case things get worse, we are prepared to protect the U.S. economy and financial system,” he said.