The Federal Reserve’s Extra Twist will do very little to boost US Economic growth.
The Federal Reserve on Wednesday extended its latest monetary stimulus program to replace short-term bonds with longer-term debt by $267 billion through the end of 2012 as policy makers lowered their outlook for growth and employment. The program, which was due to expire this month, will now run through the end of the year. The Federal Reserve has kept the main interest rate unchanged in a range of, 0 – 0.25% since December 2008. The Federal Reserve reiterated its expectation that rates would stay “exceptionally low” through at least last 2014. The Federal Reserve also sharply downgraded its forecasts for U.S.economic growth, saying it was prepared to take further steps to help the faltering recovery if needed.
The continuation of “Operation Twist” should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative, the FOMC said & also added that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustain improvement in labor market conditions.
The announcement of the extension of Twist met with a mixed reaction in financial markets. Gold, Crude Oil & U.S. stocks see-sawed on knee jerk reactions, while bond prices briefly rose. The dollar fell against the euro and rose against the yen.
Markets & traders had latched onto a line of Strong Words in the June statement, saying the Federal Reserve is “prepared to take further action.” Based on these words, there were some expectations that the Fed would embark on a new quantitative easing program, a QE3, so the market was initially disappointed. But the Fed held out the prospect of QE. “Yes, additional asset purchases are among the things we would consider if we need to take additional measures to strengthen the economy,” Fed Chairman Ben Bernanke said during his quarterly press briefing.
After expanding its balance sheet by purchasing $2.3 trillion in government and mortgage-related bonds, the Fed launched “Operation Twist” last year with a pledge to swap $400 billion in securities. Some economists continue to expect another round of outright asset purchases given the heightened risks to the recovery.
It slashed its estimates for U.S. Gross Domestic Product this year to a range of 1.9% to 2.4%, down from an April projection of 2.4% to 2.9%. The unemployment rate will end the year at 8% to 8.2%, up from 7.8% to 8% in April. It cut forecasts for 2013 and 2014, as well. Policy makers foresee a weaker economy into 2014. The unemployment rate will end that year at 7% to 7.7%, up from a 6.7% to 7.4% in April.
Lowering long term rates and sucking Treasury’s out of the market may not have much more room to be effective anymore.
The Fed’s actions may influence the November presidential election. Unemployment and the economy are a central issue as Mitt Romney, the presumptive Republican nominee, challenges President Barrack Obama. QE3 expected to come conveniently after November Elections only - Fed can’t extend this Twist’er beyond 2012 because it’s going to be out of short-term securities.
Minutes from meetings of the Bank of Japan and Bank of England released on Wednesday suggests 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.