Fed Decides to Keep 'Twisting' Through Year-End

After weeks of speculation, the Federal Reserve announced Wednesday that it would continue to combat the sluggish economy by extending “Operation Twist” until the end of 2012.

Of the options that were available, extending the program where the Fed sells short-term bonds (3-year and below) and buys longer-term bonds (6-year and above) in order to push rates lower was the most popular choice among analysts. Many market participants had been hoping for the Fed to go back to straight up bond purchases – aka QE – however, the economic data doesn’t appear to be weak enough to warrant such an extreme measure at this time.

The statement released by the FOMC was largely in line with the April statement. Perhaps the biggest change was the Fed’s view on unemployment. In April, the Fed had written, “Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated… The Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate."

However, this time the Fed acknowledged that job growth had slowed. "Growth in employment has slowed in recent months, and the unemployment rate remains elevated… The Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate."

On the subject of the economy, the statement said, "Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year…The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually."

On the inflation front, something that is likely keeping the Fed from doing any further outright bond purchases right now, the Fed wrote, "Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate."

Looking ahead, the Fed said, "The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

Finally, Richmond Fed President Jeffrey Lacker voted against the continuation of the Twist program.

In case you just can’t get enough Fedspeak, the Fed’s forecast is slated for 2:00 pm eastern and then the Bernanke press conference will begin at 2:15 pm.

Other stories on the US Economy to review:

• Housing Starts Down But Permits Up Strong
  
• UofM's Consumer Sentiment also Weak
  
• Industrial Production and Capacity Utilization Below Expectations
  
• Empire Manufacturing Disappoints in June
  
• CPI Declines in May
  
• Business Inventories Above Expectations in April
  
• Retail Sales Fall Across Board in May
  
• PPI Shows Inflation Fell at Producer Level in May
  
• NFIB Small Business Optimism Pulls Back
  
• ISM Non-Manufacturing Index Above Expectations
  
• Some Good News: Employment Trend Index Moves Up
  
• May Jobs Report Disappoints Big Time
  
• ISM Report Shows Growth Slowing
  
• Q1 GDP Revised Lower

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