Fed ramps up economic stimulus, ready to do more

WASHINGTON Wed Jun 20, 2012 7:09pm EDT

1 of 3. U.S. Federal Reserve Chairman Ben Bernanke holds a news conference at the Federal Reserve in Washington, June 20, 2012.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - 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.

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.

(Additional reporting by Jonathan Spicer, Lucia Mutikani and Jason Lange; Editing by Andrea Ricci, Tim Ahmann, Chizu Nomiyama and Andrew Hay)

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Comments (70)
MoAdimus wrote:
Ben is pushing on a string. You can hum along to his BS using the melody from “Singing in The Rain” Ladies and Gentlemen, the party is over = stop spending $$$$ we don’t have; un-elect the clueless.

Jun 19, 2012 10:47pm EDT  --  Report as abuse
TMOK wrote:
What good is it to lower rates if the banks won’t loan the money. I hope Hank Paulson is happy. Takes down the world economy by using US taxpayer money to bail out his buddies, then retires to his private island. I would say, “must be nice”, except that most of us would not be able to live with ourselves after committing such an atrocity. But for he and others like him, its just another day. Greed and unchecked power running rampant with no accountability. Another step toward the death of the middle class.

Jun 19, 2012 11:20pm EDT  --  Report as abuse
mulholland wrote:
Monetary policy cannot cure socialist fiscal deficits and a minority culture of poverty and depravity.

Jun 20, 2012 1:41am EDT  --  Report as abuse
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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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