The move from the Federal Reserve comes as it cut its own economic growth rate for the US for this year to between 1.9% and 2.4%, down 0.5% from its upper forecast of 2.9% in April. At the same time it is predicting a higher level of unemployment by the end of the year, up to 8.2% from 8% in earlier forecasts.
The original Operation Twist was due to end at the end of June with the Fed now extending this by $267bn to the end of the year. The maturity dates of these bonds are between six and 30 years, selling the same amount of Treasury securities with maturities of three years or under.
The thinking behind the move is to put more money into households and businesses and keep long-term borrowing costs low – interest rates are to stay at between zero and 0.25% into 2014 and possibly as late as the end of that year.
In a statement, the Fed said: “By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities.
“The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.”
It added: “The maturity extension program will provide additional stimulus to support the economic recovery but the effect is difficult to estimate precisely.
“The program is intended [to] contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.”
