New Federal Reserve stimulus announced

Faced with a gloomy economic outlook, the U.S. Federal Reserve announced a $400 billion bond-buying program on Wednesday.

According to Bloomberg News:

Federal Reserve policy makers will replace much of the short-term debt in their portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession.

The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting.

It’s the third major bond-buying program by the Fed in less than three years, The Associated Press reports.

According to the AP:

The Fed's new bond buying plan has been dubbed "Operation Twist" because it is designed to "twist" long-term rates relative to shorter ones. It is designed to "twist" long-term rates relative to shorter ones. The last time a similar program was used was in the early 1960s, when the twist was the rage on dance floors.

Keith Hembre, chief economist and investment strategist in Minneapolis for Nuveen Asset Management, told Bloomberg News that the program may boost growth by 0.2 percentage point to 0.4 percentage point in the next year. “The Fed, I think, is fairly constrained right now,” he said. “The Fed can either do nothing, or it can do something like this.”

Benchmark Treasury yields fell to a 60-year low of 1.87 percent, Reuters reports.

Investors expected a bond-buying program, but not the amount of 30-year bonds Fed plans to include, the AP reports.

"It's being viewed as perhaps an admission that this is a longer-term issue that the U.S. economy is facing and not one that's going to be solved over a couple of years," Oliver Pursche, president of Gary Goldberg Financial Services, told the AP.

Stocks dropped accordingly in the last hour of trading on Wednesday, the AP reports. The Dow Jones industrial average declined 283.82 points, or 2.5 percent, to close at 11,124.84. The Standard & Poor's 500 index dropped 35.33, or 2.9 percent, to 1,166.76. And the Nasdaq composite lost 52.05, or 2 percent, to end at 2,538.19.

“The Fed did the minimum of what investors expected, and they have been punished for it," Kathy Lien, director of research at GFT in New York, told Reuters. "Investors are losing confidence in the central bank because they keep on coming up short. They are now buying back dollars and positioning for a prolonged period of slower global growth."