A previous version was corrected to fix the size of the Federal Reserve’s balance sheet.
WASHINGTON (MarketWatch) — The Federal Reserve on Wednesday took another unconventional step to boost the economy, and Fed Chairman Ben Bernanke said the central bank stood ready to take more action if needed.
In the statement following its two-day meeting, the Fed said it would extend its holdings of long-term government bonds by $267 billion in another effort to bring down borrowing costs.
The Fed, which is selling an equal amount of short-term securities to hold steady the size of its $2.9 trillion balance sheet, is extending the so-called Operation Twist program that was due to end in June through the end of the year.
Bernanke told reporters at his subsequent press conference that he was watching the labor market closely.
“We still do have considerable scope to do more and we are prepared to do more,” Bernanke said.
“If we’re not seeing sustained improvement in the labor market that would require additional action,” he added.
Keeping Operation Twist in place “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” according to the central bank.
Recent economic data have been disappointing. At the moment, economists are forecasting a 2% growth rate in the second quarter. This would be the fourth quarter out of five where growth was at or below 2% — too slow a pace of growth to make a dent in the high unemployment rate.
In a statement, the Fed said that consumer spending has slowed, adding that it expected economic growth to pick up “very gradually.” “Consequently, the Fed anticipates that the unemployment rate will decline only slowly,” the statement said. The Fed’s now forecasting an unemployment rate between 8% and 8.2% this year — basically, no improvement from June’s level of 8.2%.
The Fed also noted that housing remained depressed. “Strains in global financial markets continue to pose significant downside risks to the economic outlook.”
“The Fed is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions,” the Fed said in what amounts to adopting an easing bias.
U.S. stocks initially declined, before see-sawing higher about an hour after the move took place, and then declined once more. Unrelated comments from German Chancellor Angela Merkel may have more to do with the gains then the Fed’s action.
The Dow Jones Industrial Average (US:DJIA) closed Tuesday at a five-week high, which indicates markets had priced in a good part of the Fed’s action already.
Eric Green, global head of rates research and strategy at TD Securities, said the statement “was more dovish than expected.”
“I read the Fed as saying: One more jobs report and we’ll do more,” added Justin Wolfers, an economics professor at the University of Pennsylvania, in a tweet.
