Fed ramps up economic stimulus, ready to do more

WASHINGTON Thu Jun 21, 2012 1:00pm 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 Federal Reserve on Wednesday delivered another round of monetary stimulus and said it was ready to do even more to help an increasingly fragile 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 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 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 (8)
PATRIEL wrote:
Blame should lie with the do nothing sit on thier hands Congress, its these people who abdicate their duties to the alphabet soup agencies that really run our government who in turn are appointed by the president who cares only about re-election. These agencies answer to none, they make thier own laws, enforcment arms and courts with no representation by the people. Time to rid Washinton of these people and return this country to the people. Failure to act or to come up with solutions and finger pointing is what’s killing our way of life, wish they (all of Washington) would grow up and think of somebody else for a change.

Jun 21, 2012 2:03am EDT  --  Report as abuse
Markzg wrote:
I think it should be the first which are the weak points in the economy, and then find the solution and stimulate the domestic market is stagnant, not forgetting even that there is a remnant of the housing crisis should not overlook, the stimulus must be in the private sector, getting companies to hire staff and thus lower the unemployment rate and so consumers have confidence again, making the Fed encourages people and businesses to acquire loans at lower rates, this very nice but not enough, and if it stimulates the private sector must also realizarcelo as soon, even if foreign markets are in crisis, and not even serious heavy blow to the economy.

Jun 21, 2012 2:31am EDT  --  Report as abuse
Silkster wrote:
Hey Mr Bernanke, STOP CREATING INFLATION YOU *****OLE!!! It isn’t working and all it is doing is making me poorer!! Stop stealing my money!!!

Jun 21, 2012 5:30am EDT  --  Report as abuse
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