Fed Extends "Operation Twist"

No new quantitative easing from the Fed, but that doesn't mean "QE3" is off the table.

Twist_120620_1.jpg

The nation's central bankers have decided to keep on twisting.

By SHARE

The Federal Reserve's Open Market Committee opted to extend its "Operation Twist" Wednesday, continuing a policy that involves selling shorter-term bonds and replacing them with longer-term securities. The goal: to drive down longer-term interest rates so people will borrow more and companies will invest more.

[Read about the connection between A-Rod and Ben Bernanke.]

But the Fed did not announce any new round of "quantitative easing," which Wall Street has coined "QE3." These operations have involved buying huge quantities of assets like government debt and mortgage-backed securities in an effort to pump more money into the economy.

In extending the bond maturity swap program, known among Fed watchers as "Operation Twist," beyond its expiration date at the end of the month, the central bank is continuing to maintain its policy of low interest rates but has stopped short of moves that might inflame those in Congress worried about inflation.

Recent disappointing economic data, especially the most recent jobs report for May, had led some to expect a more aggressive move.

Still, it's not time to pronounce QE3 dead just yet.

[See how the fiscal cliff is already hurting the job market.]

"Just because you don't get a QE3 this week doesn't mean we won't get it eventually. Hopes for QE3 could quickly reinflate," says Greg McBride, senior financial analyst at Bankrate.com. In particular, a further slide in U.S. economic fortunes, not to mention a worsening of the situation in Europe, could mean that the Fed will see the need for looser monetary policy, he says.

Indeed, the Fed statement says that the committee is "prepared to take further action as appropriate" both to promote a stronger recovery and job market improvements—signaling that further employment weakening may yet prompt more stimulus.

[Read about the rise in charitable giving.]

Still, there are questions as to how much additional easing would boost the economy.

"I'm not sure that these additional rounds of quantitative easing are that effective anyway," says McBride.

While the FOMC agreed on more of the same with Operation Twist, it also maintained its recent guidance on the federal funds rate, the rate at which banks loan funds to each other overnight, saying that conditions are likely to warrant an "exceptionally low" rate at least through late 2014.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.