WASHINGTON – (Reuters) – The U.S. Federal Reserve announced plans to trim its aggressive bond-buying program on Wednesday but sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised.
In what amounts to the beginning of the end of its unprecedented support for the U.S. economy, the central bank said it would reduce its monthly asset purchases by $10 billion to total $75 billion. It trimmed equally from mortgage and Treasury bonds.
The move, which could come as a surprise to many 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.
The Fed’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 “modestly” reduced the pace of bond buying in light of better labor market conditions, it said in a statement following a two-day policy meeting.
But in a move likely meant to forestall any sharp market reaction that could undercut the recovery, the central bank also said it “likely will be appropriate” to keep rates near zero “well past the time” that the jobless rate falls below 6.5 percent.
It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5 percent. The rate stood at 7.0 percent in November, a five-year low.
The Fed’s latest so-called 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.
Fed Chairman Ben Bernanke, whose term expires at the end of January, will explain the Fed’s thinking at a news conference at 2:30 p.m. (1930 GMT).
Meanwhile, the Fed lowered its expectations for both inflation and unemployment over the next few years, acknowledging the faster-than-expected drop in joblessness to a five-year low of 7 percent last month. It expects the unemployment rate to fall to 6.3 percent to 6.6 percent by the end of 2014, from a previous prediction of 6.4 percent to 6.8 percent, according to the central tendency of policymakers.
Three policymakers now expect the first rate rise to come in 2016, up from only two making that prediction in September, while a strong majority of 12 officials still see the move in 2015.
The Fed has kept interest rates near zero since the depths of the financial crisis in late 2008 and asset purchases have stoked anxiety that they could unleash inflation or fuel hard-to-detect asset price bubbles.
Even some within the Fed have worried the bond purchases could have unintended and economic costly effects.
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