Fed backs $400bn 'Twist' to boost US economy

The Federal Reserve launched a bigger-than-expected effort to stoke the ailing US economic recovery last night, aiming to screw down long-term interest rates including mortgage rates.

Despite continuing divisions in its ranks, the Federal Open Market Committee said it would shift $400bn (£254bn) of its investments in US government debt to longer-term bonds, in a widely anticipated move dubbed "Operation Twist".

And it added another new element to its loose monetary policy, a promise to buy more mortgage-backed securities. It had previously been letting its portfolio of such securities dwindle, and the change is designed to encourage banks to lend to homebuyers and existing homebuyers who want to refinance.

The measures, the committee said, are needed because of "significant downside risks to the economic outlook, including strains in global financial markets".

The Fed has already pumped more than $2 trillion of new money into the economy through the purchases of US Treasuries and other bonds, a programme called quantitative easing that increases the demand for bonds and therefore pushes down interest rates. The bond buying has often been concentrated in short-term Treasuries, though. Operation Twist is designed to more closely target the long-term rates that most affect mortgage rates and the cost of borrowing for businesses in the real economy.

Under Operation Twist, the Fed will replace some of its portfolio of short-term Treasury debt with longer-term bonds, including more than $100bn of debt with a maturity of 20 years or more.

"This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative," the FOMC said. "Economic growth remains slow. Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated."