Strains in global markets pose downside risks to economic outlook: FOMC

The U.S. Federal Reserve, which on Wednesday extended Operation Twist, will buy $267 billion in longer-dated securities by the end of 2012. Specifically the Federal Open Market Committee (FOMC) planned to purchase Treasury securities with remaining of six to 30 years and to sell an equal amount of Treasury securities with remaining maturities of approximately three years or less.

Factors weighing on the minds of the FOMC members, led by Fed Chairman Ben Bernanke, clearly included the volatility in and future risk posed by the eurozone, including the recent turmoil in Greece. Alluding indirectly to further instability emanating from this region, the FOMC said “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

With non-farm payroll employment almost constant in May, the unemployment rate was essentially unchanged at 8.2 per cent, according to the monthly survey of the economy by the U.S. Bureau of Labour Statistics. In this light, the Fed tempered its observation of moderate expansion in the U.S. economy with a projection of slow decline in the unemployment rate.

Greece situation

The Fed’s action to prop up growth this week, a move supported by 11 out of 12 FOMC members, comes in the wake of the Greece situation attaining a measure of stability after the “pro-bailout, New Democracy party” came to power.

While that development may have supplied the FOMC members with a sense of relief and a consequent belief that QE3 was not necessary at this point, the Fed is no doubt keenly aware that fiscal measures to stimulate growth are out of the question in this election year.

The Fed has thus leaned heavily on the tools at its disposal for keeping rates near zero since December 2008. It has purchased $2.3 trillion since then and launched Operation Twist in 2011. Under the programme it has already bought $400 billion in long-maturity securities to keep longer-term interest rates lower.

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