McClatchy Washington Bureau

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Shrugging off financial market pleas for more action, the Federal Reserve on Wednesday extended a controversial bond-buying program designed to lower interest rates but declined to expand into new areas even as it downgraded its forecast for employment and growth in the sluggish U.S. economy.

The rate-setting Federal Open Market Committee announced, as expected, that it would extend Operation Twist, a program in which it swaps short-term government bonds it now holds for those of longer duration. That $400 billion effort was to expire at the end of the month, and the committee decided to extend it to year’s end, swapping out another $267 billion in bonds maturing in less than three years for bonds that will mature in anywhere from six to 30 years.

“This continuation of the maturity extension program should put downward pressure on the longer-term interest rates and help make broader financial conditions more accommodative,” the committee said in a statement.

In a news conference later in the afternoon, Federal Reserve Chairman Ben Bernanke defended the effort, as well as other bond-buying programs that collectively are known as quantitative easing, saying these programs have lowered borrowing costs for people who are buying cars, homes and other things that require longer-term financing.

In its statement, the Federal Open Market Committee said the Operation Twist extension was necessary because “growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed.”

Backing that up, Bernanke released an updated Fed forecast culled from the individual forecasts of Federal Reserve governors and presidents of Federal Reserve district banks.

That collective forecast downgraded the outlook offered in April. The central tendency forecast, which strips out the most optimistic and most pessimistic views, sees growth in a range of 1.9 percent to 2.4 percent this year. That’s down from the range of 2.4 percent to 2.9 percent projected in April.

Similarly, the Fed forecast now sees unemployment this year in a range of 8 percent to 8.2 percent, the latter figure where it stands today. In April, the Fed forecast had projected the jobless rate to fall into a range of 7.8 percent to 8 percent.

Given a flurry of economic data pointing to economic deceleration, Wall Street had rallied Tuesday on expectations that the Fed would take bold action Wednesday to jolt the economy. It didn’t happen, and Bernanke instead said the Fed stood “prepared to take further action” if necessary but that now wasn’t the time for such moves. Answering questions from reporters, the Fed chief explained that there isn’t enough clarity from the incoming data.

That’s a view shared by Dean Croushore, the chairman of the economics department at Virginia’s University of Richmond and a former vice president of the Philadelphia Fed.

“The data seem like they’re showing a bit of weakness, but we don’t know how much. Some of it could be seasonal adjustment stuff, particularly in the labor data,” said Croushore, adding that the Fed doesn’t “want to take strong actions based on this short-term data. If you look at employment growth over the past year, it looks stronger than it does over the past few months.”

Asked whether concerns about the coming “fiscal cliff” – a cocktail of expiring tax cuts, government debt approaching another ceiling and across-the-board steep spending reductions – are slowing today’s economy, Bernanke said it was weighing on business but “it is still a bit early” to be having a damaging effect. He pointed to Europe’s debt woes affecting trade and investment flows, and a continued crisis in the key U.S. housing sector.

Bernanke’s views on the “fiscal cliff” contrasted with a news conference earlier Wednesday in which the Business Roundtable – a lobby for big U.S. corporations – released a CEO survey that suggested that the uncertainty caused by political gridlock in Washington already is leading to job losses.

Speaking on a conference call, the group’s chairman, Boeing Co. CEO Jim McNerney, said his company already was downsizing in anticipation of another Washington eleventh-hour solution.

“We’re taking action today because we can’t afford to wait for the last minute,” McNerney said, stressing that it goes beyond simply delaying new hires. “I think not only delayed hiring, but we’re being forced to trim employment in certain places, and I think a number of companies are doing that. There is no way to approach the prospect of sequestration without hedging a bet. There’s just no way.”

Sequestration is the process, absent a budget deal, of steep spending reductions across all of government, including defense, which is vital for Boeing. McNerney declined to say which Boeing plants were making cuts now or what kinds of jobs, but he described them as “employment adjustments downwards that are significant. . . . Let’s just leave it at that.”