US Fed continues pump priming policy
US Fed continues pump priming policy

The US Federal Reserve has unleashed a fresh wave of economic stimulus in another gambit to tackle subpar US jobs growth, and predicted a slower output expansion amid the crisis in Europe.

The Fed said it would extend an existing effort to drive down borrowing rates until at least the end of the year, as it sharply revised down 2012 growth projections to between 1.9 and 2.4 per cent.

That is a half point cut on the bracket of forecasts given as recently as April, when cautious optimism about the fate of the start-stop US recovery reigned.

At the end of a two-day crunch policy meeting of the Federal Open Market Committee (FOMC) on Wednesday, that optimism seemed to be firmly a thing of the past.

With Fed chairman Ben Bernanke predicting slower progress in reducing unemployment, the Fed extended a program that is designed to lower long-term interest rates, known as "Operation Twist". The program was due to expire at the end of the month.

The central bank will continue to switch short-term US bonds for those dated between six and 30 years. In total the program will be worth around $US267 billion.

And Bernanke gave strong hints that further action, including the Fed buying yet more assets to boost economic growth and push Wall Street toward a broader range of investments, could be in the pipeline.

"We are prepared to do more. We have to get, I think, further information about state of the economy, about where things are going, what's happening in Europe," he said at a news conference.

That admission speaks to the Fed's concern that the recovery is still not strong enough to be self-sustaining.

Since the Fed's last meeting in late April, US unemployment has ticked up to 8.2 per cent and the picture in Europe, particularly Spain, has grown bleaker.

The FOMC acknowledged the grimmer outlook. "Growth in employment has slowed in recent months, and the unemployment rate remains elevated," the post-meeting statement said.

"The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually."

The Fed, as expected, held its key interest rate near zero, reiterating it would keep ultra-low rates at least through late 2014.

But the decision to extend "Operation Twist" appeared to have been less than straightforward. According to the FOMC statement, Richmond Fed president Jeffrey Lacker voted against it.

Europe's sovereign debt crisis also had a bearing on the Fed's decision.

"Europe has had additional problems. We have seen some of those effects in financial markets," said Bernanke.

"We hope it does not get worse," Bernanke said with a nervous smile. "It is already one of the factors that has been a drag on the US economy."

The West Australian

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