The Federal Reserve will probably decide today to expandOperation Twist beyond $400 billion to spur growth and buyprotection against a deeper crisis in Europe, according to aBloomberg News survey of economists.

Fifty-eight percent of respondents in a June 18 poll said theFed will prolong the program, which seeks to lower borrowing costsby extending the average maturity of the securities in the centralbank's portfolio. The current program ends this month.

Policy makers led by Chairman Ben S. Bernanke may conclude thatgrowth is too feeble to reduce unemployment much further afterpayroll growth came close to stalling in May. At the same time,with inflation close to their 2 percent goal and the Greek electionreducing the risk of a euro breakup, they may decide an additionalround of quantitative easing isn't needed for now, economistssaid.

“Extending Operation Twist is the path of least resistance,”said Josh Feinman, the New York-based global chief economist for DBAdvisors, the Deutsche Bank AG asset management unit that oversees$232.1 billion. “It would be an extension of something we have inplace, so it would be more seamless, and it doesn't complicate exitstrategies as much because it's not expanding the balance sheet,”said Feinman, a former senior economist for the Fed Board inWashington.

The Federal Open Market Committee, which ends its two-daymeeting today, will repeat in a statement that subdued inflationand economic slack will probably warrant “exceptionally low”interest rates through at least late 2014, according to 89 percentof the economists surveyed. The statement is set for release ataround 12:30 p.m. in Washington. Sixty percent said the Fedprobably won't start a third round of large-scale bond purchases,or quantitative easing.

The Fed at 2 p.m. will release policy makers' forecasts forunemployment, inflation and the expected path of the federal fundsrate over the next several years. Bernanke plans to hold a pressconference at about 2:15 p.m.

Bank of England Governor Mervyn King was overruled for the firsttime in almost three years today as he joined a push to expandstimulus that's gathering momentum as the danger of Europe's debtcrisis intensifies. The Monetary Policy Committee voted 5-4 to keepits bond-purchase target at 325 billion pounds ($511 billion) thismonth. That defeated votes by King and two other committee membersfor a 50 billion-pound expansion.

Bonds, Stocks

Treasuries returned 3.3 percent from the end of March to June18, according to Bank of America Merrill Lynch's Treasury Masterindex, amid concern Europe's debt crisis was worsening and U.S.growth was slowing. The Standard & Poor's 500 Index lost 4.1percent, after taking account of reinvested dividends.

Since the Fed announced Operation Twist on Sept. 21, the yieldon the 10-year U.S. Treasury note fell to 1.62 percent yesterdayfrom 1.86 percent. It fell to a record low 1.4387 on June 1.

Stocks rose yesterday, sending the S&P 500 to the highestlevel in a month on speculation the Fed will announce steps toboost the economy. S&P 500 futures expiring in Septemberclimbed 0.2 percent to 1,353.80 as of 7:30 a.m. in New York.

So far under the $400 billion maturity-extension program, theFed has shifted about $383 billion into longer-term bonds. Thecentral bank has about $190 billion of debt with short-termmaturities for continuing Operation Twist for another three months,according to calculations by Nomura Securities InternationalInc.

Should the Fed extend the program beyond this month, it mayshift into mortgage-backed securities, in a bid to reduce theaverage 30-year home-loan rate from the 3.71 percent level of lastweek, said Stuart Hoffman, chief economist at PNC FinancialServices Group Inc. in Pittsburgh.

“The economy still needs monetary stimulus, though QE3 seems tobe a bridge too far,” he said. “Extending Operation Twist signalsthe Fed is on the job, yet it is not as aggressive as quantitativeeasing.”

Seventy-one percent of economists surveyed said the election inGreece won't influence Fed policy, while 22 percent said the votefavoring pro-bailout parties reduced the probability of moreaccommodation. Sixty four economists responded to the survey.

Monthly Employment

Monthly employment gains have decelerated from a high this yearof 275,000 in January. U.S. payrolls rose 69,000 in May after a77,000 increase in April, according to data from the LaborDepartment. The jobless rate climbed to 8.2 percent in May from 8.1percent the month before.

Target Corp. Chief Executive Officer Gregg Steinhafel said on aconference call last month that the Minneapolis-based retailerremains “cautious” about the U.S. expansion and is planning itsbusiness on an assumption that “the current economic recovery willcontinue to be slow and uneven.”

Retail sales fell 0.2 percent in May, following a similardecline in April, the U.S. Commerce Department said June 13. Salesexcluding automobiles slumped by the most in two years.

Those results followed a series of disappointing annual profitforecasts from consumer companies. Procter & Gamble Co.,Tiffany & Co., Lowe's Cos. and Tempur-Pedic International Inc.cut their projections, while predictions from Lululemon AthleticaInc., Limited Brands Inc., Macy's Inc. and Clorox Co. trailedanalysts' estimates.

“There is too much uncertainty not to extend Operation Twist,”said Diane Swonk, chief economist in Chicago at Mesirow FinancialInc., which oversees about $61.7 billion in assets. “They need tosignal their willingness to ease fairly strongly.”

Atlanta Fed President Dennis Lockhart, who votes on policy thisyear, described the economy in a June 6 speech as “underwhelming”and the job reports as “disappointing.” The option of prolongingOperation Twist is “on the table” he said.

The FOMC in it is post-meeting statement could voice morewillingness to buy bonds if necessary, saying that it “standsready” to adjust its balance sheet rather than that it “isprepared,” said Michael Hanson, a senior U.S. economist at Bank ofAmerica Corp. in New York.

The Fed reduced its benchmark interest rate almost to zero inDecember 2008 and later bought $2.3 trillion in securities in a bidto push longer-term borrowing costs lower. In January, it said itwould keep rates near zero at least through late 2014, extending anearlier pledge of mid-2013.

The Fed started Operation Twist in September. Unlike withquantitative easing, the program doesn't increase its balancesheet. Instead, the Fed sells short-term debt and uses the proceedsto buy longer-term bonds. By keeping its assets stable, the Fed canmore easily “exit” from record accommodation when the timecomes.

Bloomberg News

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