Fed extends Twist program, lowers economic growth forecast

The Federal Reserve closed a two-day meeting today by announcing actions it will take in an attempt to spur the sluggish economy. The Fed says it’s extending a program called Operation Twist—designed to boost borrowing and spending through lower long-term U.S. interest rates—and reiterated its plan to keep short-term rates at record lows until at least late 2014. The central bank also says it’s prepared to act further if the economy deteriorates. Under Operation Twist, the Fed has been selling $400 billion in short-term Treasurys since September and buying longer-term Treasurys. It says it will extend the program through the rest of 2012 by using $267 billion in securities. But extending Operation Twist might not provide much benefit, as long-term U.S. rates have already touched record lows. Economists question how big of an effect a slight dip in rates will have on lending by businesses and consumers who already aren’t borrowing. David Jones, chief economist at DMJ Advisors, predicts the program extension will have only a slight effect on long-term rates, perhaps lowering them by about one-tenth of a percentage point. “This move is largely symbolic,” he says. Meanwhile, the Fed also sharply lowered its outlook for U.S. growth today. It now expects the economy to grow no more than 2.4% this year. That compares with its forecast in April that the economy could grow up to 2.9%. And it thinks the unemployment rate, now 8.2%, won’t fall much further the rest of the year. Get the full story on the extension of the Twist program here; and read more about the Fed’s revised economic forecast here.