Fed twists again, extending stimulus to weak economy

The Federal Reserve on Wednesday extended its monetary stimulus to a US economic recovery that looks at risk of stalling, renewing its effort to depress borrowing costs by selling short-term bonds to buy longer-dated ones.

Expressing concern about strains in global financial markets emanating from Europe, the Fed said it was extending its Operation Twist program by buying USD 267 billion in longer-dated securities by the end of 2012. The Fed's first Twist program was set to end this month.

"This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative," the Fed said in its post-meeting statement.

The Fed added that for the duration of the new program, it would stop reinvesting the proceeds from maturing Treasuries in its portfolio.

Richmond Fed president Jeffrey Lacker, who has dissented at every meeting this year, voted against the action, saying he opposed the extension of Twist.

The central bank retained its guidance that rates were likely to stay near zero until at least late 2014. The Fed stuck to its characterisation of the economy as "expanding moderately," but said growth in employment had slowed in recent months. It also expressed worries about weaker consumer spending.

The US economy appears to be faltering as growth in the emerging world slows and Europe sinks deeper into its political wrangling over sovereign debt. First-quarter US GDP was recently revised down to a 1.9% annual rate from 2.2%.

At the same time, May jobs data confirmed that a weak labor market is faltering again, with only 69,000 new jobs created and the unemployment rate rising to 8.2%.

Heading into the Fed's meeting this week, economists were closely divided on whether the central bank would decided more monetary stimulus was needed now.

The Fed has held overnight interest rates near zero since December 2008 and has bought USD 2.3 trillion in mortgage and government bonds in a further effort to help the economy.

In 2011, the Fed launched "Operation Twist," in which the central bank sold bonds with maturities of three years or less and bought securities worth USD 400 billion with maturities of six years and longer, to push longer-term interest rates lower.

Fed vice-chair Janet Yellen earlier in June had argued further action might make sense to "insure" against downside risks given a sharp slowdown in hiring by US employers and an escalating debt crisis in Europe.

However, Fed chairman Ben Bernanke declined to tip his hand in testimony to Congress. A Reuters poll on June 8 put the chances of an extension of Operation Twist at 42.5%.

Even though Greek voters over the weekend 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 warily eyeing economic conditions.

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 meeting on July 5.