US economy all wound up

The plan was announced after the Fed decided it would not use further quantitative easing to counteract slow market growth, but instead make it easier for households and businesses to cut their long-term costs of borrowing.

Operation Twist involves the selling of short-term bonds for long-term ones, and is bought in to try and depress bond yields, in order to get a decent rate of return on investment.

“This continuation of the maturity extension programme should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” a Fed statement said.

In a news conference, Federal Reserve chairman Ben Bernanke said problems across the pond were partly to blame for the stagnate growth in the US. “Strained global financial markets associated principally with the situation in Europe continue to pose a significant risk to the recovery and to further improvement in labour market conditions,” he said. A “still depressed housing market, tight credit for some borrowers and fiscal restraint at federal, state and local levels” is also responsible.

US unemployment gains have been slower in recent months, with central figures showing a rise from eight percent to 8.2 percent from April which has caused disappointment. Forecasts for growth have now been cut from a range of 2.4 percent and 2.9 percent, to 1.9 percent to 2.4 percent by US officials.

The first state of the stimulus programme, which was due to end at the start of July, will now be bolstered with an additional $267bn in Treasury bonds to see it through to the end of December. Business writer Phillip Inman says the process works, but only in the short term: “It is perfectly possible to sell short-dated bonds and buy the long-dated variety and in the process change the make-up of the Fed’s bond portfolio,” he said. “Beyond that, the picture is murkier.”

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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