In Bernanke's final act, Fed cuts stimulus despite market turmoil

Given the U.S. economy's growing strength, the Federal Reserve pushed ahead Wednesday with a plan to shrink its bond-buying program, even though the prospect of reduced stimulus and higher interest rates has rattled global markets.

The central bank said it will cut its monthly bond purchases starting in February by $10 billion to $65 billion. It also reaffirmed a plan to keep short-term rates at record lows to try to reassure investors that it will keep supporting an economy that's stronger than at any point since the recession yet remains less than fully healthy.

The Fed's bond purchases have been intended to keep long-term borrowing rates low to spur spending and growth. Its decision Wednesday to continue paring purchases signals the Fed's belief that the economy is showing consistent improvement. In its statement, it upgraded its assessment to say "growth in economic activity picked up in recent quarters."

The Fed's decision came in a statement after Ben Bernanke's final policy meeting. He will step down Friday after eight years as chairman to be succeeded by Vice Chair Janet Yellen.

A new Gallup poll out on Wednesday showed that only 40 percent of Americans approve of how Bernanke has handled his job as Federal Reserve Chairman while 35 percent disapproved and 25 percent had no opinion. By comparision, Alan Greenspan enjoyed a 65 percent approval rating when he left office in 2006, according to the poll.  

Most economists expect that under Yellen, the Fed will announce a string of $10 billion monthly reductions in bond purchases at each meeting this year, concluding with a final $15 billion cut in December. Still, if the American economy were to falter, the Fed has stressed that it might suspend its pullback in bond buying so it could keep aggressively holding down long-term loan rates.

Many global investors fear that reduced Fed bond buying will raise U.S. interest rates and cause investors to move money out of emerging markets and into the United States for higher returns. Currency values in emerging economies have fallen over that concern.

In response, central banks in emerging economies, from India to Turkey to South Africa, have been acting to counter any damage from the Fed's pullback and the prospect of higher U.S. rates. They've been raising their own rates, hoping to control inflation, boost their flagging currencies and keep investors from fleeing.

But so far, those currencies have continued to weaken. 

Meanwhile, the Dow Jones industrial average closed down 189 points on Wednesday. It had been down 127 points just before the Fed's announcement. Disappointing earnings from big U.S. companies contributed to a sour mood on Wall Street. The yield on the 10-year Treasury note slipped to 2.68 percent.

The Fed's bond purchases have helped fuel a stock market rally over the past year as investors shifted money out of low-yielding bonds and into stocks. Now that the Fed is cutting back on those bond purchases, many investors fear stocks will fall.

"Ultimately, the Fed sort of had no choice but to reduce purchases at this meeting," said Dan Greenhaus, chief strategist at BTIG brokerage. "If they had paused, they risked sending a signal to markets that they lacked conviction."

The action Wednesday was approved on a 10-0 vote. The last time a Fed policy statement was approved unanimously was June 2011.

Al Jazeera and wire services