Federal Reserve announces tapering of stimulus plan, stocks bounce

The Federal Reserve announced plans Wednesday to begin tapering its massive stimulus program aimed at boosting the U.S. economy, citing steady job market growth.

The shift, which will see a reduction of its massive monthly bond-buying scheme, could lead to higher long-term borrowing rates for individuals and businesses.

The Fed, however, sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised.

The Fed's decision amounts to a vote of confidence in the economy six years after the Great Recession struck. It signals the Fed's belief that the U.S. economy is finally achieving consistent gains.

The U.S. central bank said in a statement after its policy meeting ended Wednesday that it will trim its $85 billion a month in bond purchases by $10 billion starting in January. At a news conference afterward, Chairman Ben Bernanke said the Fed expects to make "similar moderate" reductions in its purchases if economic improvements continue.

"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, N.J., told Reuters.

Earlier on Wednesday, Brazil's finance minister issued a plea for the Fed to end its buying sooner rather than later to reduce market uncertainty that has kept emerging economies on edge.

The Fed intends its bond purchases to drive down borrowing rates by increasing demand for the bonds. The idea has been to induce people and businesses to borrow, spend and accelerate economic growth. The prospect of a lower pace of purchases could mean higher rates.

At the same time, the Fed strengthened its commitment to record-low short-term rates. It said it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.

The Fed has kept rates near zero since the depths of the financial crisis in late 2008, and its 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 purchases could have unintended effects.

The unprecedented money printing has helped drive U.S. stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets this year as investors anticipated an end to the easing.

Nevertheless, investors appeared pleased by the Fed's finding that the economy has steadily strengthened, by its firmer commitment to low short-term rates and by the only slight amount by which it's paring its bond purchases.

The Dow Jones industrial average soared by nearly 300 points by the close of the day's trading, well over 1 percent. Bond prices fluctuated, but by late afternoon, the yield on the 10-year Treasury note was unchanged at 2.88 percent.

The Fed's move "eliminates the uncertainty as to whether or when the Fed will taper and will give markets the opportunity to focus on what really matters, which is the economic outlook," said Roberto Perli, a former Fed economist who is now head of monetary policy research at Cornerstone Macro.

But Perli noted that the Fed has hardly withdrawn its support for the economy. It will continue to buy bonds every month to keep long-term rates down and remains strongly committed to low short-term rates. By keeping interest rates historically low, the Fed "will continue to remain very supportive of risky assets," Perli said.

In updated economic forecasts it issued Wednesday, the Fed predicted that unemployment would fall a bit further over the next two years than it thought in September. And it expects inflation to remain below the Fed's target level.

The Fed expects the unemployment rate to dip as low as 6.3 percent next year and 5.8 percent in 2015. Unemployment has fallen faster this year than policymakers had predicted.

And Fed policymakers predict that their preferred inflation index won't reach its target of 2 percent until the end of 2015 at the earliest. For the 12 months ending in October, the index is just 0.7 percent.

The Fed worries about very low inflation because it can lead people and businesses to delay purchases. Extremely low inflation also makes it costlier to repay loans.

The Fed's actions were approved on a 9–1 vote. The only member to object was Eric Rosengren, president of the Federal Reserve Bank of Boston. He called the move premature because unemployment remains high and inflation extremely low.

The Fed's action comes after encouraging reports that show the economy is accelerating.

Hiring has been robust for four straight months. Unemployment is at a five-year low of 7 percent. Factory output is up. Consumers are spending more at retailers. Auto sales haven't been better since the recession ended four and a half years ago.

What's more, the stock market is near all-time highs. Inflation remains below the Fed's target rate. And Congress has passed a budget plan that seems likely to avert another government shutdown next year.

Al Jazeera and news wires