Fed Extends Operation Twist

Fed Chairman Ben Bernanke
Fed Chairman Ben Bernanke

Washington D.C

Federal Reserve Chairman Ben Bernanke announced on Wednesday  that the Federal Reserve will extend  Operation Twist through the remainder of 2012 to lower long term borrowing costs and help boost the U.S. economy.

Operation Twist involves the Central Bank purchasing long term treasury securities (bonds) with maturities of 6 years to 30 years to drive down long term borrowing costs while selling short term treasury securities with maturities of approximately 3 years or less.

Prior to yesterday’s announcement, Operation Twist was set to expire at the end of this month.

The Fed announced their first Operation Twist program on Sept 21st, 2011 which involved $400 billion worth of long term treasury purchases.

Under the second phase of Operation Twist announced yesterday, the Fed will purchase $ 267 billion worth of long term treasuries.

Before Operation Twist, the Central Bank engaged in two rounds of quantitative easing (QE 1 and QE2) that involved purchasing a total of $2.3 trillion in debt.

Economic Headwinds 

Bernanke told reporters that he was watching the U.S. labor market closely.

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Bernanke explained at a news conference in Washington following his two day meeting.

Bernanke spoke about having more ammunition available to help the U.S. economy if it worsens, causing speculation about more easing on the way later in 2012 if the economy does not improve.

“I would not accept the proposition, though, that the Fed has no more ammunition. I do think that our tools, while they are nonstandard, still can create more accommodative financial conditions and still provide support for the economy, can still help us return to a more normal economic situation” Bernanke said.

The Fed predicts the unemployment rate at the end of 2012 will fall between 8% and 8.2%. 

The unemployment rate currently stands at 8.2% while the U.S. economy added 69,000 jobs in May, the fewest in a year.

In April the Fed predicted the unemployment rate could fall as low as 7.8%.

Lowering Forecasts

The Fed lowered its estimates for U.S. economic growth for 2012 from 1.9 percent to 2.4 percent,  lower than an earlier April estimate of 2.4 percent to 2.9 percent.

Slower Engine sof Growth

Although mortgage rates are at historic lows, home sales have been mixed across the country and many banks are still unwilling to lend to anyone with less than near perfect credit and a large down payment.

Small business owners continue to struggle to get loans and banks are reluctant to lend due to higher capitalization requirements.

According to a Federal Reserve report, Changes in U.S. Family Finances From 2007- 2010 released on Monday June 11th , Americans suffered a record decline in wealth between 2007 and 2010 as home values tumbled.

Median family’s net worth dropped 38.8 % during the three-year period.  

Median net worth (value of assets minus debt)  plunged to $77,300 in 2010 from $126,400 in 2007. 

Net worth in 2010 was at levels last seen in 1992.

The housing market’s collapse was at the core of the recession when the economy contracted nearly 5.1 percent between the third quarter of 2007 and the second quarter of 2009, with the unemployment rate rising 4.5 percentage points to 9.5 percent.

The survey discovered that the decline in median net worth was large for families in groups where housing was a larger share of assets, such as families headed by someone 35 to 44 years old and families in the west region of the United States.

Data released yesterday by the Economic Policy Institute (EPI) which was reported yesterday in Marketwatch revealed that younger families age 35-44 were the hardest hit by the collapse of the housing bubble. 

While American families on average experienced a 39% drop in net worth between 2007 and 2010, younger families saw a 54% drop in the same time period.

“The EPI, a liberal think based in Washington D.C. expressed particular concern in the drop because most families start saving for retirement at this age and because younger families will have to save more than previous generations due to expected declines in pensions and Social Security benefits” according to Marketwatch.

New Data

Later this morning, existing home sales data for May will be released, providing a further glimpse into the recovering U.S housing market which has an estimated 11 million Americans still under water (owing more than the home is worth).

This Marketwatch article covers the topic about what steps could still be taken to help struggling American homeowners to refinance their mortgages by extending HARP. 

In addition to the home sales data, jobless claims and Philadelphia Fed numbers will be released on Thursday morning.



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