By Mark Felsenthal and Pedro da Costa
WASHINGTON (Reuters) - The Federal Reserve on Wednesday extended its latest monetary stimulus and sharply downgraded its forecasts for U.S. economic growth, saying it was prepared to take further steps to help the faltering recovery if needed.
The central bank expanded its "Operation Twist" by $267 billion, meaning it will sell short-term securities and buy long-term ones in an effort to keep borrowing costs down. The program, which was due to expire this month, will now run through the end of the year.
"This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative," the Fed said in a statement after a two-day meeting.
It slashed its estimates for U.S. gross domestic product this year to a range of 1.9 percent to 2.4 percent, down from an April projection of 2.4 percent to 2.9 percent. It cut forecasts for 2013 and 2014, as well.
Fed officials also see the job market making slower progress than they did just a couple months ago, with the unemployment rate now seen hovering above 8 percent for the remainder of this year. It stood at 8.2 percent in May.
The announcement of the extension of Twist met with a mixed reaction in financial markets. U.S. stocks see-sawed, while bond prices briefly rose. The dollar fell against the euro and rose against the yen.
"This is a small step. This is probably the least of their unconventional easing tools that they could have used," said Ethan Harris, North American economist for Bank of America/Merrill Lynch in New York.
A number of economists said the Fed was likely to consider a third round of outright bond purchases, or quantitative easing, which would actually increase the Fed's holdings of assets.
"The Fed is signaling they will do more if necessary," said Eric Green, economist at TD Securities.
DOWNBEAT ASSESSMENT
Hiring by U.S. employers has slowed sharply, factory output has slipped and consumer confidence has eroded. Europe's festering debt crisis and the prospect of planned U.S. tax hikes and government spending cuts weigh on the outlook.
The economy grew at only a 1.9 percent annual rate in the first quarter, and economists expect it to do little better in the second quarter.
The Fed, which has held overnight interest rates near zero since December 2008, reiterated its expectation that rates would stay "exceptionally low" through at least last 2014.
Interest rate projections released by the central bank showed that six of the its 19 policymakers do not expect rates to rise until sometime in 2015. In April, only four did.
Richmond Federal Reserve Bank President Jeffrey Lacker, who has dissented at every meeting this year, voted against the decision to extend Twist.
The Fed said that for the duration of the Twist program, it would stop reinvesting the proceeds from maturing Treasuries in its portfolio, a step analysts said was meant to ensure the central bank had ample securities to shuffle around.
After expanding its balance sheet by purchasing $2.3 trillion in government and mortgage-related bonds, the Fed launched "Operation Twist" last year with a pledge to swap $400 billion in securities.
Some economists continue to expect another round of outright asset purchases given the heightened risks to the recovery.
"They appear to be holding more firepower in reserve in case things get worse," said Allen Sinai, chief executive officer at Decision Economics in New York.
Even though Greek voters over the weekend supported candidates who back taking painful steps to stay in the euro currency union, Europe's debt crisis remains a threat to the global economy and many central banks are warily eyeing economic conditions.
Minutes from meetings of the Bank of Japan and Bank of England released on Wednesday suggest officials are poised to ease policy again. China cut benchmark rates on June 7, while the European Central Bank could take action at its July 5 meeting.
(Additional reporting by Jonathan Spicer, Lucia Mutikani and Jason Lange; Editing by Andrea Ricci and Tim Ahmann)
