The Federal Reserve Wednesday took another unconventional step to boost an economy flirting with recession, saying it would increase its share of longer-term Treasurys by $400 billion by June 2012 in an effort to make credit cheaper and spur spending and investment. More Economists React: Fed 'Doing What It Can' Why Was Statement Late? 20th Century Technology Parsing the Fed: How statement changed Full statement following September meeting Journal Community To help keep mortgage rates low, the Fed also said it would reinvest the proceeds from maturing agency debt and mortgage-backed securities into mortgage-related debt. Seven out of 10 voting officials supported the action at the conclusion of a two-day meeting of the Fed's policy making body - the Federal Open Market Committee -- highlighting continued divisions within the central bank as it tries unorthodox new ways to provide support to the economy. WSJ's Kelly Evans and Dow Jones Newswires Managing Editor Neal Lipschutz discuss the Fed's decision to maintain interest rates and purchase long-terms. They also discuss what the move means in relation to the overall economy. REUTERS/Lee Jae-Won/Files The moves came just a day after Republicans leaders in Congress took the unusual step of urging the Fed to do nothing in a letter to Fed Chairman Ben Bernanke, fearing any action could do more harm than good. Worried about inflation, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia dissented Wednesday -- the same officials who opposed the FOMC's August 9 decision that made a conditional pledge to keep short-term interest rates near zero until mid-2013. EXPERIENCE WSJ PROFESSIONAL Editors' Deep Dive: Central Bank Watch TREASURY AND RISK Central Banks More Open to Inflation FUND STRATEGY Banks Cut Rates in Fear of Contagion from Rich Nations MARKETWATCH Fed Getting More Worried about Europe Access thousands of business sources not available on the free web. Learn More Right now, however, worries inside the central bank about high unemployment and weak economic growth are trumping fears that inflation may take root or that the dollar could fall further as a result of the Fed's easy-money policies. Fed officials said in a statement that "recent indicators point to continuing weakness in overall labor market conditions" and that the unemployment rate is expected to decline only gradually. No jobs were created in August and the unemployment rate was stuck at 9.1%. The Fed said inflation seems to have moderated as the effects of high commodity prices and supply-chain disruptions from Japan's earthquake earlier this year have waned. The central bank also noted that inflation expectations have remained stable. As part of its plan to purchase more long-term securities, the Fed said it would reduce its holdings of short-term Treasury bills and notes and increase its holdings of Treasury securities with longer maturities. The move should increase the average maturity of its Treasury securities portfolio to just over eight years by the end of 2012 from a little over six years now. While the Fed acknowledged the sale of short-term securities could put upward pressure on short-term rates, it said the impact is expected to be small because of the conditional pledge it made last month that near-term rates will stay near zero until mid-2013. The idea behind the plan is that holding more long-term debt will put downward pressure on long-term rates, allowing people to get cheaper mortgages and companies to finance their operations at better rates. It's been dubbed "Operation Twist", a reference to a similar program tried with mixed results by the Fed and the U.S. Treasury in 1961. The Fed is trying to ease financial conditions without taking the more controversial step of increasing the amount of money that it's pumping into the financial system, since it will be using money already generated from other programs. A bond buying program the Fed completed in June was widely criticized internally and externally because it pumped $600 billion of newly printed money into the financial system, sparking fears of inflation. House Speaker John Boehner (R., Ohio), Senate Minority Leader Mitch McConnell (R., Ky.), and two other Republican leaders Tuesday warned Fed officials that "further extraordinary intervention" could be damaging for the economy. Their comments follow criticism of Bernanke and the Fed's policies by several Republican presidential candidates. The more potent step of launching a new round of bond purchases that would further expand the Fed's $2.867 trillion balance sheet remains a possibility, but inflation likely would need to slow much further to spur Fed officials to take that step. The Fed moves come at a pivotal time for the economy, which slowed to a crawl in the summer. It's now being threatened by spillovers from Europe's deepening debt troubles, lingering woes in the U.S. housing market and the U.S. government's inability to craft a fiscal policy that reduces deficits in the long-run while supporting the recovery in the short-run. Enlarge Image Getty Images Federal Reserve Board Chairman Ben Bernanke Economists polled by the Wall Street Journal see a one in three chance the U.S. will slip into recession again over the next year, the highest odds since the recovery began in mid-2009. The Fed said there are "significant downside risks to the economic outlook, including strains in global financial markets." The International Monetary Fund Tuesday slashed its 2012 growth forecast for the U.S. to 1.8%, from a 2.7% prediction made in June report. In a report kicking off its annual fall meetings, the global lender warned the U.S. economy could remain weak for years, describing a stalled recovery in need of another push from government. Economists aren't so sure that the Fed's latest gambit will do much to spur growth. "The odds are 'Operation Twist' won't work," Anthony Sanders, a real-estate finance professor at George Mason University, said before the Fed action. The housing market has shown no reaction to interest rates that are already at record-low levels, he said. Freddie Mac's latest survey finds the average rate on 30-year, fixed-rate mortgages at 4.09%, the lowest level in more than 50 years.
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