LITTLE ROCK — The Federal Reserve announced Wednesday that it will extend a bond-buying program known as Operation Twist to help spark an economy that’s being held back by a weakened job market.
The Fed’s program is designed to spur borrowing and spending through lower long-term U.S. interest rates.
The Fed also said it will continue its plan to keep short-term interest rates at record lows until at least late 2014 and is prepared to act further if the economy deteriorates. It gave only vague guidance about what other steps it might be prepared to take to support growth and hiring.
The central bank noted that Europe’s debt crisis threatens the economy. Fed officials will be watching for any breakthrough during a summit of European leaders next week in Brussels.
The Fed also sharply lowered its outlook for U.S. growth. It now thinks the economy will grow no more than 2.4 percent this year. That compares with its forecast in April that the economy could grow up to 2.9 percent. And it thinks the unemployment rate, now 8.2 percent, won’t fall much further in 2012.
After a two-day meeting, the Fed said in a statement that it will continue Operation Twist through year’s end. Under the program, the Fed has been selling $400 billion in short-term Treasurys since September and buying longer-term Treasurys. It said it will extend the program through December using $267 billion in securities.
But extending Operation Twist might not provide much benefit. Long-term U.S. rates have already touched record lows. Businesses and consumers who aren’t borrowing now might not do so if rates slipped slightly more.
David Jones, chief economist at DMJ Advisors, said he expected the extension of Operation Twist to 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,” Jones said.
At his quarterly news conference later Wednesday, Chairman Ben Bernanke said the Fed is open to another bond-buying program.
“If we don’t see further improvement in the labor market, we will be prepared to take additional steps if appropriate,” Bernanke said.
The Fed has completed two such programs. Through those programs, it bought more than $2 trillion in Treasury bonds and mortgagebacked securities, expanding its portfolio to more than $2.8 trillion.
“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.
Investors seemed unimpressed with the Fed’s plans. Stocks were little changed for most of the day, and the yields on Treasury bonds were trading about where they were before the announcement.
But during Bernanke’s news conference, stocks began falling. In late-afternoon trading, the Dow Jones industrial average was down about 86 points, but recovered and closed at 12,824.39, down 12.94 points.
John Canally, investment strategist at LPL Financial, said the Fed delivered just what investors expected and offered a hint at further easing.
“If there’s another misstep somewhere ... the Fed’s going to do more,” Canally said.
For now, he said, the Fed wants to keep “some powder dry” in case there’s a meltdown in Europe. Canally also suggested that the Fed may be reluctant to be aggressive in an election year out of concern it could be seen as affecting the election.
But in a comment on Twitter, Justin Wolfers, an economics professor at the University of Pennsylvania’s Wharton Business School, suggested that the Fed might be on the cusp of going further.
Wolfers characterized their view as: “One more bad jobs report and we’ll do more.”
In its statement, the Fed noted that oil and gasoline prices have fallen. Lower prices give the Fed room to take further action without igniting inflation.
The Fed’s statement was approved on a 11-1 vote. Jeffery Lacker, president of the Richmond Regional Fed Bank, dissented for the fourth-straight meeting. The statement said he opposed the continuation of Operation Twist.
The U.S. economy looks weaker than it did when the Fed last met in April. Growth was more sluggish in the first three months of the year than first estimated.
Job growth averaged only 73,000 in April and May, after average gains of 226,000 per month in the first three months of the year.
The number of people seeking unemployment benefits has risen about 5 percent in the past six weeks, and employers posted sharply fewer job openings in April compared with the previous month.
And economists worry the debt crisis in Europe is worsening, even after Greek election results increased the likelihood that Greece will stay in the euro currency alliance.
Still, U.S. inflation is tame. Core consumer prices, which exclude volatile food and energy costs, have risen just 2.3 percent over the past 12 months. That’s close to the Fed’s 2 percent target for inflation.
Critics have complained about the Fed’s efforts to promote growth over the past three years by purchasing more than $2 trillion in bonds. They say the extra money added to the banking system could ignite inflation once the economy rebounds.
Information for this article was contributed by Martin Crutsinger, Paul Wiseman and Christopher S. Rugaber of The Associated Press; by Kevin G. Hall of McClatchy Newspapers; and by Jeff Kearns and Joshua Zumbrun of Bloomberg News.
Business, Pages 27 on 06/21/2012