The economic situation in the United States has recently taken another slide. The big picture says that the economy is doing well compared to the past three years; many economists and financial analysts predicted substantial growth early in the year, which proved to be the case. Since then, though, the hiring rate has slowed and employment prospects have been on a dive. Consumer spending also slowed down, which greatly affects economic growth in the US, as 70 percent of the US market is fueled by consumers.
In response to the current woes troubling the economy, the US Federal Reserve plans to extend its $400-billion contribution to help the economy by adding a further $267 billion to the program. The said government agency will launch a campaign to sell short-term bonds and then use the proceeds to secure bonds with longer durations. This approach, the Federal Reserve reports, will help lower the long term interest rates and hopefully attract more people to apply for loans.
The $400-billion economic assistance launched by the Federal Reserve, dubbed as “Operation Twist”, was set to expire at the end of this month. Operation Twist began in September last year. This move by the Federal Reserve was conceived last year to help alleviate the financial pressures of the economic conditions at that time. The program got its name from the popular dance hit back in the 1960s called “The Twist”.
Operation Twist involves selling the government’s share in treasury bonds that are scheduled to mature in not more than three years. The profits from the sale are then channeled to acquire long-term bonds that are set to mature within six to 30 years. Since long term plans have lower interest rates, this move will encourage investors to focus their money on stocks instead of treasury bonds. The desired effect is that investors will be enticed to delve into new mortgage-backed securities, which will allow the Federal Reserve to support the housing market.
Economists and financial analysts say that while it is impossible to determine whether Operation Twist has worked or not, the numbers point out that rates on mortgages and other consumer and business loans almost broke record lows. Still, extending Operation Twist by supplying the program with additional funds may lead to more borrowing by consumers.
The Federal Reserve now predicts that the economic growth this year will be at 2.4 percent, starkly different from its April forecast of 2.9 percent. The unemployment rate is also a major concern. Last April, economists and analysts believed that the jobless trend would go down to as low as 7.8 percent. Currently, the unemployment rate is at 8.2 percent.
The Federal Reserve stated that the agency will do everything in its capacity to help boost economic activity.