Is the Fed’s OPERATION TWIST the End-All Answer?
Financial stocks were riding on a high on Wednesday after the Federal Reserve extended the Operation Twist program until the end of the year. Shares of JPMorgan Chase (NYSE:JPM) rose almost 4 percent to $36.71 also after a report that the bank had dumped a substantial part of a derivatives trade that cost it between $2 billion to $3 billion in losses. Shares of Citigroup (NYSE:C) rose almost 1 percent, American Express (NYSE:AXP) was up .72 percent, Wells Fargo (NYSE:WFC) ticked lower .82% and Bank of America (NYSE:BAC) gained .12% in the afternoon.
The Fed announced on Wednesday it would extend its holdings of long-term government bonds by $267 billion in an effort to bring down borrowing costs and boost the economy. Under the plan, the central bank tries to lower long-term interest rates by selling shorter-term bonds and using the funds to buy longer-term bonds. The program, called Operation Twist, was announced in September 2011 and was due to end in June.
The program’s continuation “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the bank said. “Strains in global financial markets continue to pose significant downside risks to the economic outlook.”
The central bank added that it was concerned about the economy and had taken into account recent disappointing economic data. A barely 2 percent growth rate has been forecast for the second quarter, which will make this the fourth quarter out of five where growth has been at or below 2 percent. Consumer spending had also slowed, the Fed said, the unemployment rate was expected to decline only slowly, while housing also remained depressed.
The Fed said it will leave its target range for federal funds rate unchanged at 0 percent to 0.25 percent, where it has been since December 2008. It will also not make any change to the guidance that they expect to keep rates steady until late 2014. The bank added that it would continue to reinvest the proceeds of maturing agency debt and mortgage-backed securities into mortgage-related debt.
The Fed’s statement was approved by a 11-1 vote, with Jeffery Lacker, president of the Richmond Regional Fed Bank, dissenting for the fourth straight meeting.
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