US Federal Reserve to taper bond-buying programme

The US Federal Reserve last night trimmed its aggressive bond-buying programme, but sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom.

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 $10 billion, bringing them down to $75 billion.

The move, which surprised some investors, was a nod to better prospects for the economy and jobs market.

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,” Mr Bernanke told a news conference.

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 $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 $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.

The Fed’s latest quantitative easing program, or QE, was launched 15 months ago to kick-start hiring and growth in an economy that was recovering only slowly from the Great Recession. The Fed’s first QE program was launched in the midst of the 2008 financial crisis.

In fresh quarterly forecasts, the central bank lowered its expectations for both inflation and unemployment over the next few years, acknowledging the jobless rate had fallen faster than expected. It now sees it reaching a range of 6.3 percent to 6.6 per cent by the end of 2014, from a previous prediction of 6.4 per cent to 6.8 per cent.

Reuters