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June 20, 2012, 3:50 p.m. EDT · CORRECTED

Fed continues ‘Twist’; Bernanke hints at more

Bernanke and colleagues watching labor market closely

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By Greg Robb, MarketWatch

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Richmond Fed President Jeffrey Lacker cast the lone dissent, a consistent position at all four meetings this year.

In his discussion of the economy, Bernanke said the European debt crisis is slowing the U.S. economy.

But the Fed will stick to playing a consulting role with the region’s leaders.

“There is a lot of work to be done” in the euro zone, he noted.

The housing market and weak state and local governments are also dampening growth.

Bernanke said that a lack of credit was a major issue for the economy.

He said that the Fed was very interested in a U.K. plan, dubbed funding for lending, where the Bank of England would offer British banks access to cheap loans as long as they agree to lend it to companies and households.

Many economists had expected the action. They said it was, in part, a signal to markets that the central bank is prepared to do whatever it takes to spur demand. Several economists had speculated the Fed would also purchase mortgaged-backed securities as part of the Twist.

A few were surprised.

Mike Moran, chief economist at Daiwa Securities America, said he thought the Fed would hold steady, awaiting for more clarity about whether the recent slowdown in the economy was a payback for a warm winter.

Moran said he thought the Fed finally decided to move in order not to “frustrate or confuse the market” that had come to expect the central bank would extend the Twist program.

Some analysts doubt whether the move will do much to spur the economy.

Ethan Harris, co-head of global economic research at Bank of America, recently described Twist as “like shooting a squirt gun at the economy.”

The Fed will ultimately launch another large-scale asset purchase program, or quantitative easing, to help support the economy, Harris said.

Fiscal policy, which many analysts say would be more effective in helping the slumping economy, is widely seen as frozen until after the November presidential election. Then lawmakers will have to quickly make deals to avoid a “fiscal cliff” of planned tax hikes and spending cuts that could throw the economy back into a recession.

In its statement, the Fed announced that it will leave its target range for its federal funds rate unchanged at 0% to 0.25%, where it has been since December 2008.

Fed Chairman Ben Bernanke

Central bankers also made no changes to the guidance that they expect to keep rates steady until late 2014.

The Fed said it would continue to reinvest the proceeds of maturing agency debt and mortgage-backed securities into mortgage-related debt.

Harvard economics professor Martin Feldstein said recently that the Fed’s Operation Twist has helped the bond market and the stock market, but has had little impact on economic activity.

Since the Twist plan was first announced late last September, the 10-year note yield  has fallen to 1.65% from 2% and residential mortgage rates have fallen to 3.71% from 4.09%. But other factors, especially a flight to safe U.S. assets as the European debt crisis intensified, have played a part in bringing down bond yields, analysts said.

Over the same eight months, the Dow industrials have jumped 15.4%.

Greg Robb is a senior reporter for MarketWatch in Washington.

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