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Gloomy Fed announces more economic stimulus

The Federal Reserve unleashed a fresh wave of economic stimulus last night as it predicted that US growth would be even worse this year than thought.

The Fed doubled down on a programme to lower long term borrowing costs, as it sharply revised down 2012 growth projections to between 1.9-2.4%.

That was a half point cut from predictions made in April this year, when cautious optimism reigned.

Fed Chairman Ben Bernanke also pointed to slower progress in reducing unemployment and to spillovers from Europe's economic crisis.

Instead the Fed's top policy panel - the Federal Open Market Committee (FOMC) - decided to extend a bond-swap programme dubbed "Operation Twist" that was to expire at the end of the month.

The plan is designed to push down interest rates on long-term bonds, encouraging investors to move money into more neglected securities and lowering costs for borrowers. The central bank will continue to switch short-term US bonds for those dated between six and 30 years. In total the programme will be worth around $267 billion.

Few are betting that this will be the last move by the Fed to boost the economy. Indeed, Bernanke gave strong hints that further action could be in the pipeline, so long as recent poor economic data proves not to be a statistical blip.

"We are prepared to do more. We have to get, I think, further information about state of the economy, about where things are going, what's happening in Europe," he said at a news conference.

Since the Fed's last meeting in late April, US unemployment has increased to 8.2% and the picture in Europe, particularly Spain, has grown bleaker.

"Europe has had additional problems. We have seen some of those effects in financial markets," said Bernanke. "We hope it does not get worse," he added.

But Bernanke faces opposition to further action from within the Fed. According to the FOMC statement, Richmond Fed president Jeffrey Lacker voted against extending "Operation Twist," a measure seen as several steps short of the Fed outright pumping more cash into the economy.

Wall Street, which had seemed unsure what to expect from the meeting, gave a cautious response to the news, with the Dow Jones finishing the day down 0.1%.

Many of the bolder Wall Street analysts had expected the Fed to charge to the rescue. Some had predicted that the Fed could have decided to spend $600 billion more on mortgage securities and US bonds to try to jump-start investment.

The more modest bond-swapping plan brings with it concerns that it may not carry a big enough bang, or any bang at all.

While Bernanke insisted the Fed has more ammunition left to fight, many wonder if it will offer the 12.7 million Americans who are out of work much bang for the their buck.

Unemployment has been above 8% for more than three years despite the Fed launching a battery of innovative stimulus measures that pushed the limits of central banking. The bank predicted last night that unemployment would remain above that rate at least for the remainder of this year.

The Fed, as expected, also held its formal interest rate near zero, reiterating it would keep ultra-low rates at least through late 2014.