The Fed defies Republican demands with new action to purchase longer-term securities and bring down long-term rates.
In response to continued slow economic indicators, The Federal Reserve will purchase, by the end of June 2012, $400 billion of longer-term Treasury securities with remaining maturities of six years to 30 years, the Federal Open Market Committee announced today.
The committee, which is within the Federal Reserve, said that the move was “consistent with its statutory mandate” to “foster maximum employment and price stability.”
“Economic growth remains slow,” the committee said in a statement. “Recent indicators point to continuing weakness in overall labor market conditions and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months.”
The Committee intends to purchase the Treasury securities and to sell an equal amount of shorter-term Treasury securities with remaining maturities of three years or less. Today’s action—which economists dubbed “Operation Twist,” a reference to a similar Fed action in 1961, according to Bloomberg — is intended “to put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative” for businesses and consumers, the Committee said.
To support conditions in mortgage markets, the Committee also announced it will reinvest principal payments from its holdings of agency debt and agency-backed securities.
The economy has resisted recovery efforts. More than 25 million people were unable to find full-time employment in August. Partisanship in Washington and Europe’s unsteady economy have also taken their toll on consumer confidence. Investors with a net worth between $100,000 and $1 million surveyed by Millionaire Corner are more concerned this year with the political environment, the national debt, tax increases and inflation than they were last year.
Today’s action by the Committee was supported by Chairman Ben Bernanke, Vice Chairman William Dudley, Elizabeth Duke, Charles Evans, Sarah Bloom Raskin, Daniel Tarullo, and Janet Yellen. Voting against the action were Richard Fisher, Narayana Kocherlakota and Charles Plosser.
The action was taken despite calls by Republicans for the Fed to cease trying to stimulate growth as their efforts have thus far been ineffectual. “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” read a letter that Republican leaders in the House and Senate sent yesterday to Bernanke.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.