story by Jeff Kearns and Joshua Zumbrun
BLOOMBERG — The Federal Reserve will expand its 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 continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said Wednesday (June 20) in a statement at the conclusion of a two-day meeting in Washington.
“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Ben Bernanke said at a news conference after the meeting.
He said those steps might include additional asset purchases.
Bernanke and fellow policy makers are taking steps to shore up the world’s largest economy as faltering growth leaves it vulnerable to fallout from the European debt crisis and looming fiscal tightening in the U.S.
Payrolls expanded at the slowest pace in a year in May, and the jobless rate has been stuck above 8% since February 2009.
“Growth in employment has slowed in recent months, and the unemployment rate remains elevated,” the FOMC said. “The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually.”
The Fed’s two rounds of asset purchases totaling $2.3 trillion and record-low interest rates since December 2008 have left the central bank short of its full-employment goal.
The economy added 69,000 jobs in May, the fewest in a year, and the unemployment rate unexpectedly climbed to 8.2% from 8.1%, its first increase in almost a year.
Companies are cutting back as the economy shows signs of slowing. FedEx Corp., operator of the world’s largest cargo airline, is restructuring its express business and retiring 24 jet freighters.
Also taking a toll on the economy: concern that Congress will fail to reach a compromise in time to avoid $600 billion in tax increases and budget cuts next year.
Economic data in recent weeks have pointed to slowing growth.
Retail sales fell 0.2% for a second month in May, according to a June 13 report from the Commerce Department, as elevated unemployment and the smallest wage gains in a year prompted consumers to curtail their spending.
Industrial production unexpectedly fell in May for the second time in three months as factories turned out fewer vehicles and consumer goods, data from the Fed showed last week.
On the other hand, housing, the industry at the heart of the financial crisis, has shown some signs of recovery. Homebuilders broke ground on more single-family houses for a third consecutive month in May and rising construction permits pointed to further gains.
“The Fed will do more as necessary, and this puts emphasis on it,” said Eric Green, a former New York Fed economist who is now global head of FX, Rates and Commodities at TD Securities in New York.
Policy makers left unchanged their view that economic conditions will probably warrant keeping interest rates “exceptionally low” at least through late 2014. The FOMC has kept the main interest rate in a range of zero to 0.25% since December 2008. Fed officials lowered their forecasts for growth and raised their predictions for unemployment in each of the next three years.
Policy makers now see 1.9% to 2.4% growth in 2012, down from their April forecast 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.
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, according to their so-called central tendency estimates, which exclude the three highest and three lowest forecasts.
The Fed said today it will sell Treasury securities with remaining maturities of about three years or less. It will purchase securities with six years to 30 years remaining.
The existing maturity extension program, known as Operation Twist, was announced in September and expires this month. Under that program, the Fed is selling $400 billion of short-term government debt and replacing it with the same amount of longer- term Treasuries.
The Fed left unchanged its policy of reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities.
Inflation “has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable,” the Fed said today.
Oil prices have slumped 23% to $84.03 a barrel yesterday since reaching a high of $109.77 a barrel in February, while the national average cost of gasoline has declined to $3.49 a gallon from a 2012 peak of $3.94 in April, according to data compiled by the American Automobile Association.
Richmond Fed President Jeffrey Lacker dissented for the fourth meeting in a row, saying he doesn’t support extending Operation Twist. He said last month he believes the central bank will probably need to raise the main interest rate next year.
It was the first meeting for Governors Jeremy Stein and Jerome Powell, who joined the Fed last month, raising the Washington-based board to its full, seven-member strength for the first time since 2006.
Fifty-eight percent of economists in a June 18 Bloomberg News survey said the FOMC would prolong Operation Twist, with an additional 8% predicting the Fed would announce the move at its meeting on July 31-Aug. 1. Eleven percent predicted a third round of large-scale asset purchases, or quantitative easing.
Europe’s debt crisis has intensified since the FOMC’s meeting in April, roiling financial markets. The Standard & Poor’s 500 Index was down by 4.3% as of yesterday from its 2012 peak on April 2.
“Europe is a wealthy area they have adequate resources to address these problems,” Bernanke said at the news conference. “The Federal Reserve is very much involved with talking with European leaders.”
Since the Fed announced Operation Twist on Sept. 21, the yield on the 10-year U.S. Treasury note declined to 1.62% as of yesterday from 1.86%. It fell to a record low 1.4387 on June 1.
Global asset prices have rallied since Greek election results stirred speculation the nation won’t exit the euro, and on expectations the Fed would take action to spur growth.
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 Barack Obama.
Romney, who has charged Obama with mismanaging the economy, said in a June 17 CBS News interview that quantitative easing didn’t yield the intended benefits and a third round wouldn’t either.
The second round “was not extraordinarily harmful, but it does put in question the future value of the dollar and it will obviously encourage some inflation,” Romney said. “A QE3 would do the same thing.”