The U.S. Federal Reserve will start scaling back its monthly bond-buying program as early as next month, but the reduction will be gradual. The Federal Reserve has been buying 85 billion dollars a month in government bonds in an effort to keep interest rates low and boost economic growth.
Ever since the U.S. central bank introduced the latest round of monetary stimulus 12 months ago, long-term interest rates have remained near zero and unemployment has fallen a full percentage point. As a result, the Federal Reserve says it's time to begin reducing its bond purchases by 10 billion dollars starting in January.
Fed Chairman Ben Bernanke says the decision reflects the committee’s confidence in the U.S. recovery.
“Notably despite significant fiscal headwinds, the economy has been expanding at a moderate pace, and we expect that growth will pick up somewhat in coming quarters, said Bernanke.
Although inflation remains well below levels that would suggest growth, the Fed says the economy is likely to expand at an annualized rate of about 3%, with unemployment falling to about 6.5% by the end of 2014.
Bernanke says further reductions in bond purchases will take place in measured steps, depending on economic conditions.
“If the economy slows for some reason or we are disappointed in the outcomes, we could skip a meeting or two. On the other side, if things really pick up, then of course we could go a bit faster. But my expectation is for similar moderate steps going forward throughout most of 2014, he said.
Stocks surged on Wall Street following the announcement. Even though many investors were expecting the Fed’s bond purchases to remain at current levels until March, economist Uri Dadush said the impact of the so-called “taper” was anticipated the moment Bernanke hinted at the possibility in May.
Despite the improved outlook, Bernanke warns the economy still needs the Fed's support. Bernanke, who is set to step down in January, says his replacement is committed to keeping interest rates near record lows until unemployment falls well below 6.5%.
The Dow Jones industrial average rose 292.71 points or 1.84%, to end at 16,167.97, a record closing high. The S&P 500 gained 29.65 points or 1.66%, to finish at 1,810.65, also a record closing high. The Nasdaq Composite added 46.384 points or 1.15%, to close at 4,070.064.
European shares also advanced, more than recouping the previous session's losses, as investors positioned for the conclusion of a two-day US Federal Reserve policy meeting. Asian stocks were also climbing following the Fed's announcement.