The Federal Reserve's s policy-setting body, the Federal Open Market Committee, said the U.S. economy had continued to expand at a moderate pace in recent months but the unemployment rate remains high and the central bank is worried that economic growth will not be strong enough to "generate sustained improvement in labor market conditions."
To replace Operation Twist, which expires at the end of this year, the central bank said it would start buying longer-term Treasury bonds, initially at a pace of $45 billion per month. The Federal Reserve will also continue its current program of buying mortgage-backed securities at a pace of $40 billion per month, maintain the policy of reinvesting payments from its holdings of housing-related securities into similar debt paper, and from January resume rolling over maturing Treasury securities.
"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities and employ its other tools as appropriate, until such improvement is achieved in a context of price stability," the FOMC said in a statement.
The Federal Reserve, which has held its federal funds target at 0-0.25 percent since December 2008, said it expects to maintain this highly accommodative policy stance for a "considerable time after the asset purchase program ends and the economic recovery strengthens."
Breaking new ground by setting an explicit target for the unemployment rate, the Federal Reserve said the low interest rate should be kept "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
In its latest economic forecast, the Federal Reserve doesn't expect the U.S. unemployment rate to fall below that target until 2015 when it forecasts a jobless rate of 6.0-6.6 percent. In 2013 and 2014 the jobless rate is expected to remain at up to 7.7 percent and 7.3 percent, respectively.
The unemployment rate fell to 7.7 percent in November from October's 7.9 percent, but much of that is due to workers exiting the workforce.
Under Operation Twist, which was launched in September, the Federal Reserve has been extending the maturity of its bond holdings by selling $45 billion worth of short term bonds a month and buying the same amount in long-term bonds, helping keep those yields low. The program, which did not expand the Fed's $2.86 trillion balance sheet, was not expected by economists to be continued as the Federal Reserve is starting to run low of short-term bonds.U.S. economic growth picked up to an annual rate of 2.5 percent in the third quarter from 2.1 percent in the second quarter after the Gross Domestic Product expanded by a quarterly 2.7 percent.
It's latest forecast calls for economic growth of 1.7-1.8 percent this year, rising to 2.3-3.0 percent in 2013, slightly down from its September forecast of 2.5-3.0 percent. In 2014 the U.S. economy is projected to expand by 3.0-3.5 percent and 3.0-3.7 percent in 2015.
The Federal Reserve doesn't expect any inflationary pressures in the next few years, with headline and core inflation seen remaining below 2.0 percent through 2015. In October, the U.S. headline inflation rate rose to 2.2 percent from October's 2.0 percent.