Gloomy Fed pulls trigger on more economic stimulus
WASHINGTON — The Federal Reserve unleashed a fresh wave of economic stimulus Wednesday as it predicted subpar US growth would be even worse this year than thought.
After a two-day meeting the Fed doubled down on a program to lower long-term borrowing costs, as it sharply revised down 2012 growth projections to between 1.9 and 2.4 percent.
That was a half point cut from predictions made as recently as April this year, when cautious optimism reigned.
With Fed Chairman Ben Bernanke also pointing to slower progress in reducing unemployment and to spillovers from Europe’s economic crisis, that optimism has been put to bed.
Instead the Fed’s top policy panel — the Federal Open Market Committee (FOMC) — decided to extend a bond-swap program dubbed “Operation Twist” that was to expire at the end of the month.
The plan is designed to push down interest rates on long-term bonds, encouraging investors to move money into more neglected securities and lowering costs for borrowers.
The central bank will continue to switch short-term US bonds for those dated between six and 30 years. In total the program will be worth around $267 billion.
Few are betting that this will be the last move by the Fed to juice the economy.
“It is almost surprising that the FOMC ‘only’ committed to a six-month extension of Twist,” said Stephen Stanley, chief economist with Pierpont Securities.
Indeed, Bernanke gave strong hints that further action could be in the pipeline, so long as recent poor economic data proves not to be a statistical blip.
“We are prepared to do more. We have to get, I think, further information about state of the economy, about where things are going, what’s happening in Europe,” he said at a news conference.
Since the Fed’s last meeting in late April, US unemployment has ticked up to 8.2 percent and the picture in Europe, particularly Spain, has grown bleaker.
“Europe has had additional problems. We have seen some of those effects in financial markets,” said Bernanke.
“We hope it does not get worse,” Bernanke said with a nervous smile.
Still Bernanke faces opposition to further action from within the Fed.
According to the FOMC statement, Richmond Fed president Jeffrey Lacker voted against extending “Operation Twist,” a measure seen as several steps short of the Fed outright pumping more cash into the economy.
Wall Street, which had seemed unsure what to expect from the meeting, gave a cautious response to the news, with the Dow Jones Industrial Average finishing the day down 0.1 percent.
Many of the bolder Wall Street analysts had expected the Fed to charge to the rescue.
Some had predicted that the Fed could have decided to spend $600 billion more on mortgage securities and US bonds to try to jump-start investment.
The more modest bond-swapping plan brings with it concerns that it may not carry a big enough bang, or any bang at all.
“We see this as a way for the Fed to avoid having to make another decision before the election,” said Michael Gapen of Barclays Capital, a reference to the presidential elections in November.
While Bernanke insisted it has more ammunition left to fight, many wonder if it will offer the 12.7 million Americans who are out of work much bang for the their buck.
Unemployment has been above eight percent for more than three years despite the Fed launching a battery of innovative stimulus measures that pushed the limits of central banking.
On Wednesday the bank predicted unemployment would remain above that rate at least for the remainder of this year.
On Wednesday the Fed, as expected, held its formal interest rate near zero, reiterating it would keep ultra-low rates at least through late 2014.