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Fed moves to juice US economy, but Wall Street wanted a jolt

The US central bank said Wednesday it will act to keep long-term borrowing costs low, to help stimulate the economy amid a weakening forecast. The Fed shaved 0.5 percent off its outlook for GDP growth this year.

By Ron SchererStaff writer / June 20, 2012

Specialist Joseph Dreyer, right, watches the decision of the Federal Reserve as he works at his post on the floor of the New York Stock Exchange June 20. The Federal Reserve is extending a program designed to drive down long-term interest rates to spur borrowing and spending.

Richard Drew/AP

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In yet another effort to boost the US economy, the Federal Reserve Open Market Committee has decided to keep pushing down long-term interest rates, which could help people searching for a mortgage or corporations looking to do long-term financing.

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However, the Fed's actions, termed Operation Twist because it involves the central bank selling short-term US treasuries and buying an equal amount of long-term bonds, disappointed those on Wall Street who had hoped to see more aggressive steps to stimulate the economy.

“I think there was a slight disappointment,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “There was a little bit of anticipation [that] the Fed would hint at the timing of some kind of additional easing or economic stimulus.”

Wall Street was also somewhat disappointed, says Mr. Dickson, to hear the central bank's forecast for the economy: modest weakening and little pickup in hiring. And, in an indication that the Fed expects the economy to be in slow motion no matter who is elected president in November, the Fed says it will keep short-term interest rates low through the end of 2014.

In a press conference Wednesday, Federal Reserve Chairman Ben Bernanke called the central bank’s new steps “substantive,” and said the Fed is “prepared to do what is necessary to provide support for the economy.”

Mr. Bernanke indicated that the Fed could move interest rates still lower. Short-term interest rates are almost zero. The 10-year Treasury bill is about 1.46 percent, and the yield on the 30-year Treasury bond is about 2.72 percent. Reflecting these low interest rates, mortgage rates are at close to record lows – 3.63 percent for a 30-year fixed loan.

The Fed’s actions might do more than lower borrowing costs for people seeking mortgages or loans, Bernanke added. By buying securities from banks, the Fed might induce investors (such as banks) to buy corporate bonds, which would provide a better return, he said. Or, a bank may opt to make a loan instead of reinvesting the money in US Treasury securities.


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