THE US central bank last night moved to help an economic recovery that looks at risk of stalling.
The Federal Reserve extended a monetary stimulus programme due to end this month. Under "Operation Twist", the Fed sells short-term bonds to buy longer-dated ones, in order to reduce the rate charged on them. The yield on long-term bonds sets the rate for many loans, such as fixed mortgages and term loans for companies.
The Fed said it was extending its Operation Twist programme by buying $267bn (€210bn) in longer-dated securities by the end of 2012.
"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," it said in a statement.
US Treasuries and the dollar rose after the Fed's announcement, but then declined. On Wall Street, the S&P500 extended earlier losses and hit its lowest point for day, before recovering slightly.
Some investors were disappointed with the statement after expectations for sound policy action helped support a rally in so-called risk assets in the past two weeks. Since the Fed announced Operation Twist last September, the yield on the 10-year US Treasury bond has declined to 1.62pc from 1.86pc, but is up from a record low of 1.44pc on June 1.
Analysts say that investors are beginning to worry about the very low yields (and high prices) for "safe haven" bonds of the US, Germany and Britain, given the financial strains which all three face in different ways.
Minutes from the Bank of England show that its governor Mervyn King was in a minority on the policy committee who wanted another round of quantitative easing (QE) -- popularly know as "printing money."
Markets were disappointed that the Fed stopped short of approving a fresh expansion of QE after €2.3 trillion of bond purchases -- not swaps -- in previous rounds. They are not convinced that further falls in already low long-term rates will have much effect.
The average rate on a 30-year, fixed mortgage in the US fell to a record 3.67pc this month. Douglas Yearley, CEO of Toll Brothers, a US luxury homebuilder, said this was having an effect.
"There is huge pent-up demand that has built over the last four years. People (are now ready to) take advantage of great interest rates," he said.
The Federal Open Market Committee, which sets interest rates, offered a bleaker picture of the US economy than it had at its last gathering two months ago. It noted that employment growth has slowed and consumer spending was rising at a weaker pace and warned that global financial strains continued to pose "significant downside risks" to the economy.
The Fed's main concern is the sluggish employment picture. The world's biggest economy added 69,000 new jobs in May, the fewest in a year, and the unemployment rate unexpectedly climbed to 8.2pc, its first increase in almost a year. (Additional reporting by Bloomberg and Reuters)