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Fed to boost economy with $400bn 'Operation Twist'

The US Federal Reserve launched "Operation Twist" last night in a bold attempt to drive down long-term interest rates and reinvigorate the faltering economy.

The central bank said that it would buy $400bn of bonds with remaining maturities of six to 30 years and finance that by selling an equal amount of bonds with three years or less to run.

Ultimately, it might reduce rates on mortgages and other consumer and business loans.

Fed policymakers announced the move yesterday after a two-day meeting. Three members dissented from the decision.

Many analysts have said the shift in the Fed's portfolio could provide modest help to the US economy by reducing borrowing costs and perhaps raising stock prices. Others say it won't help and warn that the move could escalate inflation.

In June, the Fed completed a $600bn bond-buying programme that may have helped keep rates low.

Stocks fell immediately after the announcement. The yield on the 10-year treasury note tumbled, and its price rose.

Expectations that the Fed would expand its holdings of long-term securities, along with fears of another recession, have led investors to buy up US treasurys. Treasury yields have dropped in response.


Once the Fed announced last month that it would expand its September policy meeting from one to two days, economists had anticipated some new action from the Fed. Chairman Ben Bernanke had said the Fed was considering a range of options.

The US central bank is under pressure to revive an economy that has limped along for more than two years since the recession officially ended.

In the first six months of this year, the US economy grew at an annual rate of just 0.7pc. The housing market remains depressed. The unemployment rate is 9.1pc. In August, the economy didn't add any jobs, and consumers didn't increase their spending on retail goods. The Fed has offered its own bleak outlook. At its August policy meeting, it said the economy would likely struggle for at least two more years. As a result, it said it planned to keep short-term rates near record lows until mid-2013.

The Fed's move yesterday came despite a rift within the bank. Three members dissented from the Fed's decision at its August meeting -- the most negative votes in two decades. The three, all regional bank presidents, said the policies may be raising the risk of high inflation.

Mr Bernanke's policymaking has also incited criticism from Republicans. Some have argued the Fed's $600bn bond-buying programme, which ended in June, raised inflation pressures, weakened the dollar's value against other currencies and lead to a spike in oil prices.

The Fed's efforts to stimulate the US economy through low rates are occurring at a time when Congress is focused more on shrinking spending.

US President Barack Obama has proposed a $447bn job-creation programme made up mainly of tax cuts and public works spending. He also wants the richest Americans to pay higher taxes to help cut federal budget deficits.

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