Washington (United States) (AFP) – The Federal Reserve announced Wednesday it would begin to taper its massive stimulus program next month as it sees improvement in the U.S. economy and the ailing job market.
The Fed will spend $75 billion on bonds a month starting in January, down from the $85 billion a month it has spent for a year, in an effort to tamp down long-term interest rates to stimulate growth and jobs, the Federal Open Market Committee said after a two-day monetary policy meeting.
Stocks rallied sharply after the Fed action, which marked the beginning of the end of five years of its easy-money policy, aimed at helping the world’s largest economy recover from the devastating recession.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the FOMC said in a statement.
Noting the negative impact of the federal government’s tax hikes and spending cuts on growth since the start of the current asset-purchase program, the FOMC said it “sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.”
The FOMC said it now saw the outlook for the economy and the labor market as having become “more nearly balanced” but voiced concern about weak inflation, which is well below the Fed’s 2.0 percent target.
Fifteen minutes before the markets closed, the Dow Jones Industrial Average was up 1.75 percent at 16,153.85 and the S&P 500 added 1.63 percent.
The taper decision took many analysts by surprise. A slight majority had expected the Fed to wait until the January or March meetings to allow time for more data to assess whether the economy would be strong enough to withstand a reduction in bond purchases.
Fed Chairman Ben Bernanke acknowledged in a news conference that the economy had a way to go to get back on track, but insisted the taper did not mean a reduction in the Fed’s support because of the growing size of the bond holdings and the near-zero interest rate.
“We’re not doing less,” Bernanke said. “We have been aggressive to keep the economy growing.”
The Fed, as widely expected, held its key interest rate at 0-0.25 percent where it has been for five years to support the recovery.
Bernanke highlighted a change in the FOMC’s forward guidance on when the federal funds rate could be increased.
The committee said it would likely keep the current near-zero rate “well past the time” that the unemployment rate declines below 6.5 percent, especially if projected inflation continued to run below the Fed’s 2.0 percent target.
The FOMC noted that inflation persistently below the target could pose risks to economic performance, and it is monitoring developments carefully for evidence that inflation will move back toward its objective over the medium term.
In updates of its economic forecasts, the Fed projected gross domestic product growth between 2.8 percent and 3.2 percent, a tenth point wider than the 2.9-3.1 percent range it projected in September.
It projected the unemployment rate, currently at 7.0 percent, would fall to a range of 6.3-6.6 percent by the end of next year, an improvement from the prior estimate of 6.4-6.8 percent.