The Two-Way
12:11 pm
Wed June 20, 2012

Will The Fed Take Extra Steps To Stimulate Economy?

Originally published on Wed June 20, 2012 1:33 pm

Update at 12:33 p.m. ET. Fed Extends 'Operation Twist':

The Federal Reserve said it was extending its "Operation Twist" through the end of year. It will add $267 billion more to the program in which the Fed sells some of its medium-term bonds in order to buy longer-term ones. In theory, that pushes down the interest rate on longer-term loans, especially mortgages.

In its statement, the Federal Reserve said it was taking that step because since its last meeting in April, "growth in employment has slowed in recent months, and the unemployment rate remains elevated."

The Fed added:

"Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable."

All but one of the members of the Federal Open Market Committee voted in favor of the action.

Update at 12:39 p.m. ET. Economic Forecast:

The Fed said that the "housing sector remains depressed" and "inflation has declined."

Still the Fed basically kept the same outlook its had for the economy for a while, now. It said:

"The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate."

Update at 12:41 p.m. ET. Interest Rate At Near Zero:

As expected, the Committee said that it was keeping the interest rate for federal funds at near zero. It said it expects to keep that rate at "exceptionally low levels" at "least through late 2014."

Update at 12:52 p.m. ET. Stocks Stumble:

The Wall Street Journal reports that the Fed's announcement, the American stock markets dipped:

"The Dow Jones Industrial Average lost 68 points, or 0.5%, to 12766, after trading lower by about 30 points prior to the announcement. The Standard & Poor's 500 index lost nine points, or 0.7%, to 1349, and the Nasdaq Composite declined 15 points, or 0.5%, to 2917.

"The Dow initially dropped as many as 90 points before bouncing back modestly in the following minutes. The euro also dropped as the dollar moved higher. Gold was largely unchanged after the announcement, off about 1.3% on the day."

Update at 1:31 p.m. ET. Rates Already Low:

One criticism of the "Twist" program you'll hear is that it won't help ease the housing market because interest rates are already at historic lows.

Not so says The Wall Street Journal:

"The issue to consider here is, again, the counterfactual. The Fed has been a big force pushing long rates down by engaging in the twist. If it stopped, you could have seen some movement in the other direction. No movement doesn't necessary mean it was unsuccessful."

Our Original Post Continues:

All eyes are on the Federal Reserve today. The Federal Open Market Committee finishes its two-day meeting and they will issue a statement at 12:30 p.m. ET.

Remember, since the FOMC last met, all signs have pointed to a slowing economy and many are expecting the Fed to take further action to stimulate the economy.

Bloomberg surveyed economists and most of them believe the Federal Reserve is unlikely to announce the third round of quantitative easing. Instead, the economists said, they see the Fed expanding Operation Twist beyond $400 billion.

Bloomberg reports:

"Fifty-eight percent of respondents in a June 18 poll said the Fed will prolong the program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank's portfolio. The current program ends this month.

"Policy makers led by Chairman Ben S. Bernanke may conclude that growth is too feeble to reduce unemployment much further after payroll growth came close to stalling in May. At the same time, with inflation close to their 2 percent goal and the Greek election reducing the risk of a euro breakup, they may decide an additional round of quantitative easing isn't needed for now, economists said."

One analyst said Operation Twist would be the "path of least resistance." Fed Chairman Ben Bernanke is also scheduled to give a press conference at 2:15 p.m. ET.

Just for clarity, in Operation Twist, which was enacted in September, the Fed sold some of its medium-term bonds in order to buy longer-term ones. In theory that puts downward pressure on longer-term rates.

NPR's Marilyn Geewax also provides an explainer.

We'll update this post with the latest, so make sure to refresh the page.

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