Tags: Fed, Federal Reserve, federal reserve board, FOMC decision, fomc interest rates, FOMC Meeting, FOMC statement, Operation Twist, QE3, Quantitative Easing, U.S. Economy

Today's FOMC Meeting: Fed Votes Operation Twist to Continue

By , Contributing Writer, Money Morning •

Today's FOMC meeting - which started Tuesday - ended in a widely expected manner.

The Fed announced it will extend Operation Twist, which was set to expire at month's end, until the end of 2012, in an effort to keep interest rates low.

The Fed will expand Operation Twist, which replaces short-term bonds with longer-term debt, by $267 billion.

In a statement, the FOMC said the prolongation of Operation Twist "should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative."

The Fed pointed to the U.S. economy's poor recovery as reason for more "twist."

"Growth in employment has slowed in recent months and the unemployment rate remains elevated," the Fed reported. "Household spending appears to be rising at a slower pace than earlier in the year."

The lack of more intense stimulus, namely a third round of quantitative easing, sent the Dow Jones, which had been flat all day, plummeting some 50 points in just seconds. All three major indexes treaded lower following the report. Gold, hoping for QE3, sold off some $25 an ounce.

The yield on the 10-year Treasury note rose to 1.67% just after 1 p.m. in New York from 1.62% late yesterday.

Today's FOMC Meeting: Why Operation Twist?

Most economists agreed that Operation Twist was the easiest move for the Fed.

"It would be an extension of something we have in place, so it would be more seamless and it doesn't complicate exit strategies as much because it's not expanding the balance sheet," Josh Feinman, a former senior economist for the Fed Board in Washington who now works with DB Advisors, told Bloomberg News before today's Fed announcement.

Under this policy, which started in September 2011, the Fed sold some of the medium-term bonds it already owned and used the proceeds to buy ones with longer maturities. In theory, that pressures long-term rates lower, making it easier for businesses and consumers to get credit.

But, with banks much tighter on lending, and most Americans not qualifying for the record low rates, Operation Twist has had minimal impact on motivating the economy. Those historic low rates have gotten the sluggish U.S. economy nowhere to date.

The Fed did as little as it needed to do, although it did say it's "prepared to take further action as appropriate to promote a stronger economic recovery and sustain improvement in the labor market."

However, the window to rouse the slowing U.S. economy is closing. And an extension of Operation Twist isn't enough.

The stock market today reflected this sentiment.

"They are disappointing the markets," Tony Volpon, head of emerging market research for the Americas at Nomura Securities, told Reuters of the Fed's actions. "The Twist amount, while no QE, was sort of at the low end of what people were expecting. So there is a bit of a risk-off move here, in equities, currencies, everything. But before acting more forcefully, I think people will wait for the press conference. The statement does say they are willing to do more. Hopefully we'll get more information at the news conference and see how dovish they are really."

A mere half hour after the conclusion of today's FOMC meeting, markets bounced off their lows. But, more volatility could follow Fed Chairman Ben Bernanke's 2:15 p.m. EDT press conference.

Related Articles and News:

[epom]