Fed Extends Operation Twist, Hints at More Action

NEW YORK (TheStreet) --The Federal Reserve chose to extend its Operation Twist program till the end of the year on Wednesday, delivering a dose of accommodation that Wall Street was widely expecting.

The central bank's open market committee, whose decision was the culmination of a two-day policy meeting, also said it was "prepared to take further action as appropriate to promote a stronger economic recovery and market sustained improvement in labor market conditions in a context of price stability."

The Fed now plans to purchase Treasuries with remaining maturities between 6 years and 30 years at the current pace and sell or redeem Treasury securities with remaining maturities of 3 years or less as it attempts to keep long-term interest rates low. The current Operation Twist program was scheduled to expire in June.

Extending the Operation Twist program was the Fed's path of least resistance, as it does not increase the size of the central bank's balance sheet or raise fears of inflation.

Still, the market's initial reaction to the news was one of mild disappointment. That might have something to do with the slightly more negative tone in the policy statement.

The committee noted that growth in employment had slowed in recent months, a change from its previous statement in April, when it noted that labor market conditions had improved.

The Fed also pointed out that household spending was growing at a slower pace than earlier in the year.

Once again, the central maintained that strains in global financial markets continue to pose "significant downside risks" to economic outlook and said it expects economic growth to moderate in coming quarters before picking up "very gradually" with the unemployment rate declining "only slowly" towards levels consistent with the Fed's mandate.

The market will learn more about the Fed's economic outlook when it releases its specific projections later in the afternoon and at Chairman Ben Bernanke's press conference.

Investors will be looking to Bernanke for cues that the Fed might do more, as the statement did not rule out further action and also noted that inflation had declined, allowing it more room for additional accommodation.

Jeffrey Lacker was the only voting member on the FOMC who voted against the action to continue the maturity extension program.

-- Written by Shanthi Bharatwaj in New York

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