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FED MAKES MOVE AS FORECAST DIMS

The extension of Operation Twist aims to cut borrowing costs and keep things moving.

New York Times

WASHINGTON - The Federal Reserve announced Wednesday a modest increase in its efforts to reduce borrowing costs for businesses and consumers by extending its existing Operation Twist asset-purchase program through the end of the year.

The decision reflects growing concern that the economy once again is stumbling into the summer months after the false promise of a relatively strong winter. The Fed now expects the unemployment rate to fall no lower than 8 percent this year, and inflation to rise no higher than 1.7 percent, both signs of an ailing economy.

Fed officials also have indicated a desire to insure against a pair of looming risks, that events in Europe will freeze global financial markets and that the political stalemate in Washington over fiscal policy will undermine the domestic recovery.

But the program extension does not appear large enough to boost growth significantly. Instead, it amounts to a placeholder, an effort to soothe markets and preserve the status quo while the Fed seeks greater clarity about the health of the economy, economists said.

The Fed's chairman, Ben Bernanke, said the situation "is not entirely clear."

"We have to get further information about the state of the economy, about where things are going and about what's happening in Europe," Bernanke said at a news conference following the release of the policy statement and projections. "We are prepared to do what is necessary."

Fed officials said they now expect the economy to expand 1.9 to 2.4 percent this year, down from an April forecast of 2.4 to 2.9 percent.

The economic forecast, released separately, reflected reduced prospects for 2013, as well. The Fed estimated growth of 2.2 to 2.8 percent, down from 2.7 to 3.1 percent in the April forecast.

Growth at that pace would barely dent unemployment and, indeed, the Fed also reeled in its expectations for a continued decline in the unemployment rate. It now expects the rate to sit between 7.5 and 8 percent at the end of 2013, up from an April forecast of 7.3 to 7.7 percent.

The Fed's policymaking committee said in a statement that it expected the economy would continue to grow at a "moderate pace," but it noted that employment growth and household spending both had slowed in recent months.

In response, the Fed said it would buy about $267 billion in longer-term Treasury securities over the next six months, with money raised by selling some of its current holdings of short-term Treasury bonds. The Fed already has purchased $400 million in long-term securities at the same monthly pace since September.

Studies of this first installment of Operation Twist have concluded that it reduced interest rates by about 0.15 to 0.2 percentage points. But its impact, like those of the Fed's earlier purchase programs, has been muted by the inability of many businesses and consumers to obtain loans. Economists estimate that this second installment will have an even smaller impact, commensurate with its size.

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