Fed to extend operation twist

June 20, 2012 at 1:30 PM
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WASHINGTON, June 20 (UPI) -- The U.S. Federal Reserve said Wednesday it would extend its exchange of short-term notes for long-term notes to put continued pressure on interest rates.

The program known as an operation twist was to end this month. But the Fed said growth in employment "has slowed in recent months and the unemployment rate remains elevated."

The central bank said it would keep its lending rate at zero to 0.25 percent, which was not unexpected, as the Fed has already said it would likely keep rates at historic lows through 2014.

By extending operation twist, the Fed said it would continue to allow short-term bonds to mature, but would reinvest the proceeds in bonds that mature in six to 30 years.

Mortgage rates have been flirting with record lows for months. However, the idea beyond the extension of the bond swap is to convince businesses that interest rates will remain low for an extended period.

The Fed's options for stimulating the economy are considered thin, especially as its primary tool for stimulation, the bank-to-bank lending rate, is already set as low as it can go.

The Open Market Committee said it "intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less."

Policy makers voted 11-1 to continue operation twist with Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, voting against the extension.

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