By shifting purchases to longer-dated securities, the central bank is able to bring down stubborn long-term rates — for instance, those on corporate loans and mortgages — without printing more money. Printing money increases the chance of inflation, which invites political criticism.
“This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to [ease] broader financial conditions,” the Fed said.
But economists with varying ideologies said the economic impact of Operation Twist would be small.
“The Fed has really shot all of its big guns already,” said Stephen D. Oliner, a resident scholar at the American Enterprise Institute and a former associate director at the Fed. “The real problems in the economy are beyond the Fed’s control.”
Michael Mandel, chief economic strategist at the Progressive Policy Institute, said the impact would be minor. “What we have in the economy is real weakness on government and business investment,” he said, referring to public spending on infrastructure and education and the reluctance among corporations to bankroll hiring, equipment and plants. “What the Fed is doing is not going to have that much of an effect.”
Large companies are already “swimming in as much money as they need. They’re not making decisions based on a tenth of a percentage point,” he said. “Small business[es] are having trouble getting loans, no matter what the interest rate is.”
The Fed declined to take more aggressive efforts. One option would have been offering a firm commitment to keep interest rates ultra-low through 2014 or longer; the Fed says only that it expects to do so through 2014. A second initiative would have been printing hundreds of billions of dollars to purchase Treasury bonds and mortgage securities, increasing the amount of money invested by the Fed in the economy.
Republicans, including presumptive GOP presidential nominee Mitt Romney, have said that another round of asset purchases, known as “quantitative easing,” is unwarranted.
At its meeting Wednesday, the Fed also significantly reduced its estimate of economic growth, employment and inflation over the coming years, raising the odds of additional action to boost growth in coming months. Most senior officials at the Fed do not see any actions to withdraw support until at least late 2014.
By simply renewing Operation Twist, which was launched last year and was set to end this month, the Fed is sending the signal that it wants more time to see if the lull in hiring will abate.
“The Fed played it safe, taking out a little more insurance against downside growth risks, while positioning themselves to do more if Europe deteriorates or the labor market fails to pick up,” JPMorgan Chase chief U.S. economist Michael Feroli said in a research note.
The Fed is constrained because it has already engaged in several major rounds of stimulus to encourage economic growth, but with a frustratingly low level of success. Its strongest weapon — the federal funds rate, a benchmark for most lending — is near zero.
Other central banks have been acting aggressively lately. China’s central bank cut a key interest rate several weeks ago, spurring a rally. The Bank of England announced a measure last week to boost lending to British consumers and businesses.
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