US Central Bank Tries ‘Twist’ To Spark Economy

Posted September 21st, 2011 at 2:58 pm (UTC-5)
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The U.S. central bank is hoping a so-called “twist” will help revive the country's lagging economy by driving lending rates even lower.

The Federal Reserve's benchmark lending rate is already at an all-time low of zero to one-quarter of a percent, but the Fed said Wednesday it will sell short-term securities in its portfolio to buy longer-term holdings.

The goal of the policy, known as “Operation Twist,” is to lower yields on U.S. Treasury bonds in the hopes of driving down the lending rates consumers gets from banks for mortgages and other loans.

In a statement released at the conclusion of the Federal Open Market Committee's two-day meeting, officials said the Fed will buy $400 billion of longer term securities while selling off an equal amount of investments that will mature in three years or less.

U.S. stocks dropped significantly in trading following the announcement.

The Fed also said it expects some pickup in the pace of the U.S. economic recovery but warned of significant risks from strained financial markets across the world.

The U.S. economic recovery has been uneven as many Americans struggle to find work. The unemployment rate is at 9.1 and has hovered above 9 percent for months.

Federal Reserve Chairman Ben Bernanke has repeatedly said the central bank still has ways to help spark economic growth. But the Fed's board of governors had been divided over whether to make any moves.

Earlier this week, leading Republican lawmakers took the unusual step of writing a letter to the Fed, urging the central bank to do nothing.

The letter, signed by House Speaker John Boehner and Senate Minority Leader Mitch McConnell, warned the central bank to “resist further extraordinary intervention,” saying such moves had yet to help boost the economy. They also warned new action could do “further harm.”

A leading Democratic senator, Charles Schumer, criticized the letter, accusing Republicans of meddling in the central bank's affairs.

Key sectors of the U.S. economy, like the housing market, have faced difficulties despite previous actions by the central bank and lawmakers.

A report released Wednesday by the National Association of Realtors said sales of previously owned homes rose 7.7 percent in August, from the previous month. But the trade group's report also said sales were driven by investors buying foreclosed homes.