Faced with a fragile economic recovery that appears to be losing steam, the Federal Reserve voted Wednesday to extend a program designed to stimulate the economy for another six months
Under "Operation Twist," an effort to thaw credit markets and keep real interest rates low, the Fed will continue to sell billions in short-term bonds and use the funds to buy longer-term securities through 2012. The program had originally been slated to end this month.
The Fed cited slow economic growth in recent months for its continued action to support the U.S. economy and noted that it remains prepared to take further action if necessary.
The announcement comes as recent economic reports have shown slower hiring and stagnating employment along with growing risks associated with strains to the global financial system.
With inflation remaining relatively under control, the Fed also decided to keep its benchmark target interest rate effectively at zero and reiterated that "exceptionally low" interest rates are likely warranted through at least late 2014.
Federal Reserve Chairman Ben Bernanke, speaking to reporters following the announcement, said the extension of "Operation Twist" was one of the ways the Fed could seek to boost the economy even though the most traditional policy action, the lowering of interest rates, is essentially not available.
Bernanke also noted that, like many economic analysts and observers, their projections about the pace of the economic recovery had proved too optimistic.
"The committee is prepared to take further actions if appropriate" to promote the recovery and provide for "sustainable improvement in labor market conditions," he said.
Bernanke categorized the extension of the bond program as a "substantial step" that will provide additional support to the economy. Furthermore, he noted that these kinds of actions continue to support economic conditions even after they program technically expires.
"Additional asset purchases are something we would consider," he said.
Bernanke also cautioned that "monetary policy, by itself is not going to solve the economic program" and called for collaboration with Congress and the executive branch to enact policy solutions.
Although the danger of the looming "fiscal cliff" at the end of the year is substantial, Bernanke noted that the Fed still can take further "unconventional" actions to boost employment and economic growth.
The "fiscal cliff" represents the automatic tax increases and spending cuts due to take effect at year's end that could create a drag on the economy and recovery.
"I wouldn't accept the proposition that the Fed has no more ammunition," he said. "Monetary policy still does have some capacity to strengthen the economy."
However, Bernanke indicated that the Fed would remain cautious about taking further actions, because the options available to central bank are less well understood and carry their own sets of costs and potential risks.
"We have to get further information on the state of the economy … [and] what is going on in Europe," Bernanke said. "Non-standard programs have various costs and risks … I don't think they should be launched lightly."
by RTT Staff Writer
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