By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The Federal Reserve on Wednesday took another unconventional easing step to boost the economy, saying it would extend its holdings of long-term Treasurys by $267 billion in another effort to bring down borrowing costs.
The Fed said it would sell an equal amount of short-term securities to hold steady the size of its $2.9 billion balance sheet and the reserves held by banks.
Recent economic data has been disappointing. At the moment, economists are forecasting a 2% growth rate in the second quarter. This would be the fourth quarter out of five where growth was at or below 2%.
This is too slow a pace of growth to make a dent in the high unemployment rate.
In a statement, the Fed said that consumer spending has slowed. It said it expected economic growth to pick up “very gradually.”
“Consequently, the Fed anticipates that the unemployment rate will decline only slowly,” the statement said.
Only one of the 12 voting members voted against the action at the end of the two-day meeting of the Fed’s interest-rate setting body – the Federal Open Market Committee.
Richmond Fed president Jeffrey Lacker cast the lone dissent, continuing a trend at all four meetings this year.
Economists had expected the action. They said it was, in part, a signal to markets that the Fed is prepared to do whatever it takes to spur demand. Several economists had speculated the Fed would also purchase mortgaged-backed securities as part of the Twist.
U.S. stocks weakened in the immediate aftermath of the move, with the Dow Jones Industrial Average DJIA -0.19% down about 74 points. The dollar rose, both moves which mean the action was probably slightly less aggressive than the market expected.
Some analysts doubt whether the move will do much to spur the economy.
Ethan Harris, co-head of global economic research at Bank of America, recently described Twist as “like shooting a squirt gun at the economy.”
The Fed will ultimately launch another large scale asset purchase program, or quantitative easing, to help support the economy, Harris said.
Fiscal policy, which many analysts say would be more effective in helping the slumping economy, is widely seen as frozen until after the November presidential election. Then lawmakers will have to quickly make deals to avoid a “fiscal cliff” of planned tax hikes and spending cuts that could throw the economy back into a recession.
In its statement, the Fed announced that it will leave its target range for its Fed funds rate unchanged at 0 to 0.25%, where it has been since December 2008.
They also made no changes to the guidance that they expect to keep rates steady until late 2014.
The Fed said it would continue to reinvest the proceeds of maturing agency debt and mortgage-backed securities into mortgage-related debt.
The Fed will release updated economic projections and views on the appropriate path of interest rates at 2:00 p.m. Bernanke will hold a press conference at 2:15.
Harvard economics professor Martin Feldstein said recently that the Fed’s Operation Twist has helped the bond market and the stock market but has had little impact on economic activity.
Since the Twist plan was first announced late last September, the 10-year note yield 10_YEAR +0.74% has fallen to 1.65% from 2% and residential mortgage rates have fallen to 3.71% from 4.09%. But other factors, especially a flight to safe U.S. assets as the European debt crisis intensified, have played a part in bringing down bond yields, analysts said.
Over the same eight months, the Dow Jones Industrial Average has jumped 15.4%.
Greg Robb is a senior reporter for MarketWatch in Washington.
