The U.S. Federal Reserve said Wednesday it will extend Operation Twist, launching another round of bond buying in an effort to drive long-term interest rates even lower.

The aim would be to spur more borrowing, spending and economic growth.

Chairman Ben Bernanke said the Fed Reserve is open to purchasing more Treasury bonds to lower long-term interest rates and boost growth if the economy worsens.

"If we don't see further improvement in the labor market, we will be prepared to take additional steps if appropriate," Bernanke said at a news conference after the Fed's two-day policy meeting.

The central bank noted hiring has weakened, consumer spending is rising more slowly and the economy needs more support.

It will continue the longer-term bond buying through the end of the year. The bank has been selling $400 billion US in short-term Treasuries since September and buying longer-term Treasuries. It says it will shift another $267 billion through December.

It left its key policy lever, the federal funds rate, at a record low near zero. 

But extending Operation Twist might not provide much benefit. Long-term U.S. rates have already touched record lows. Businesses and consumers who aren't borrowing now might not do so if rates slipped slightly more.

Move seen as 'symbolic'

David Jones, chief economist at DMJ Advisors, said he expected the extension of Operation Twist to have only a slight effect on long-term rates, perhaps lowering them by about one-tenth of a percentage point.

"This move is largely symbolic," Jones said.

The central bank also noted that Europe's debt crisis threatens the U.S. economy. Fed officials will be watching for any breakthrough during a summit of European leaders in Brussels next week.

Later Wednesday, the Fed sharply lowered its outlook for U.S. economic growth and predicted the unemployment rate won't fall much further this year.

In its updated quarterly forecast, the Fed said it expects the economy will grow no more than 2.4 per cent this year.

That's much slower than its forecast in April, when it predicted growth as fast as 2.9 per cent. And it isn't much better than the 1.9 per cent annual pace of growth in the first three months of 2012.

The Fed also predicted the unemployment rate will fall no lower than eight per cent by year's end. The rate is now 8.2 per cent. In April, the Fed said the unemployment rate could be as low as 7.8 per cent at year's end.

The central bank is also forecasting lower inflation. At its highest, it expects inflation to rise 1.7 per cent this year, well below its two per cent target. The decline is largely due to a steep drop in gasoline prices.

The Fed has held the federal funds rate low since December 2008. And it has said it plans to keep it there until at least late 2014.

Prepared to act further

The central bank said it is prepared to take further action as required.

John Canally, investment strategist at LPL Financial, says the Fed delivered just what investors expected and offered a hint at further easing.

"If there's another misstep somewhere — in Europe ... more weak data — the Fed's going to do more," Canally said.

For now, he said, the Fed wants to keep "some powder dry" in case there's a meltdown in Europe. Canally also suggested that the Fed may be reluctant to be aggressive in an election year out of concern it could be seen as affecting the election.

But in a comment on Twitter, Justin Wolfers, an economics professor at the University of Pennsylvania's Wharton Business School, suggested that the Fed might be on the cusp of going further.

Wolfers characterized their view as: "One more bad jobs report and we'll do more."

U.S. employers added just 69,000 jobs in May. Since averaging a healthy 252,000 a month from December through February, job growth has slowed to a lacklustre average of 96,000 over the past three months.

With files from The Associated Press