The US Federal Reserve delivered another round of monetary stimulus and said it was ready to do even more to help an increasingly fragile US economic recovery.
The central bank expanded its ‘Operation Twist’ by $267 billion meaning it will sell that amount of short-term securities to buy longer-term ones to keep long-term borrowing costs down. The program, which was due to expire this month, will now run through the end of the year.Fed chairman Ben Bernanke, speaking at a news conference after a two-day policy meeting, said the central bank was concerned Europe’s prolonged debt crisis was dampening US economic activity and employment.
“If we are not seeing sustained improvement in the labour market that would require additional action,” he said on Wednesday. “We still do have considerable scope to do more and we are prepared to do more.”
The Fed slashed its estimates for US economic growth this year to a range of 1.9% to 2.4%, down from an April projection of 2.4% to 2.9%. It cut forecasts for 2013 and 2014, as well.
In addition, officials said they expect the job market to make slower progress than they did just a couple months ago, with the unemployment rate now seen hovering at 8% or higher for the rest of this year. It stood at 8.2 % in May.
The Fed’s announcement met with a mixed reaction in financial markets. US stocks see-sawed, with the benchmark S&P 500 index closing down slightly, while prices for most government bonds slipped. The dollar fell against the euro and rose against the yen.
A number of economists said the Fed was likely to eventually launch a more aggressive program to buy bonds outright. It has already purchased 2.3 trillion dollar in debt in two earlier bouts of so-called quantitative easing.
“The burden of proof may now be on the incoming data to prove that a third round of large-scale asset purchases may not be necessary,” said Millan Mulraine, economic strategist at TD Securities in New York.
Wall Street’s top bond firms still see a 50% chance the Fed will launch a third round of so-called quantitative easing.
Hiring by US employers has slowed sharply, factory output has slipped and consumer confidence has eroded, with Europe’s festering crisis and the prospect of planned US tax hikes and government spending cuts casting a shadow on the recovery.
The economy grew at only a 1.9% annual rate in the first quarter — a pace too slow to lower unemployment — and economists expect it to do little better in the second quarter.