Fed acts to stimulate US economy - with a Twist

The Federal Reserve will not pump extra money into the ailing US economy, but policymakers last night unveiled a new scheme which they hope will stimulate growth.

Operation Twist will see the Fed sell about $400bn (£253bn) worth of bonds maturing within three years and swap this for longer-term securities.

Although it puts no new money into the economy, the Fed hopes the move will keep long-term interest rates down and boost mortgage lending and loans to businesses.

It said the action was necessary amid "significant downside risks" to its economic outlook.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated," the Fed said in a statement.

"There are significant downside risks to the economic outlook, including strains in global financial markets."

Six of the Fed's senior officials backed chairman's Ben Bernanke's Twist policy, with three dissenters.

But the Fed's failure to kick off a third round of quantitative easing spooked investors.

The Dow Jones closed almost 300 points, or 2.5%, lower at 11,124 while the S&P 500 and the Nasdaq were also hit.

Oil prices also tumbled on the news, with Brent crude falling 18 cents a barrel at just over $110.

The move by the Fed comes after the International Monetary Fund slashed its growth estimates for the US, Europe, and Japan.

Meanwhile on Wednesday, the Bank of England said members of its Monetary Policy Committee had considered a new round of quantitative easing to pump money into the economy. The case for more QE was "strengthening", it said in a statement.