WASHINGTON (REUTERS) – The US Federal Reserve trimmed its aggressive bond-buying program on Wednesday but sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised.
In what likely amounts to the beginning of the end of its unprecedented support for the US economy, the central bank said it would reduce its monthly asset purchases by US$10 billion (S$12.5 billion), bringing them down to US$75 billion.
The move, which surprised some investors, was a nod to better prospects for the economy and labor market and marks a historic turning point for the largest monetary policy experiment ever.
Fed Chairman Ben Bernanke said that if US jobs gains continue as expected, the bond purchases would likely continue to be cut at a “measured” pace through much of next year. They would probably be wound down “late in the year, certainly not by the middle of the year,” he said. “The recovery clearly remains far from complete."
He said he consulted closely on the decision with Janet Yellen, the Fed’s vice chair who is set to succeed him after his second four-year term at the central bank’s helm ends on January 31. “She fully supports what we did today,” Mr Bernanke said.
Stocks initially dropped, but quickly rebounded and touched their highest levels of the day as Mr Bernanke spoke. Similarly, bond prices slid but then bounced back. The dollar rose against the euro and the yen.
The Fed’s extraordinary money-printing has helped drive US stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets earlier this year as investors anticipated an end to the easing. “They finally pulled a Band-Aid off that they’ve been tugging at for a long time,” Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.
The central bank’s asset purchase program, a centerpiece of its crisis-era policy, has left it holding roughly US$4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.
The Fed said monthly purchases of both mortgage and Treasury bonds would be trimmed by US$5 billion starting in January.
In a move aimed at forestalling a sharp market reaction that could undercut the recovery, the Fed said it “likely will be appropriate” to keep overnight rates near zero “well past the time” that the jobless rate falls below 6.5 per cent, especially if inflation expectations remain below target. The Fed has held rates near zero since late-2008.
It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5 per cent. The rate stood at 7.0 per cent in November, a five-year low.