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Fed ends bond-buying scheme; keeps interest rates low for now

The bond-buying program, or quantitative easing, has been a main feature of the Fed's response to the financial crisis

The Federal Reserve confirmed Wednesday that it intends to scrap its bond-buying program at the end of the month — an indication that the central bank is confident that the U.S. economy is on the right trajectory.

In its monthly statement, the Fed also signaled that it would keep its benchmark interest rate at a record low. The move is aimed at supporting a U.S. job market that is improving but still not fully fit and helping lift inflation from unusually low levels.

The rate would remain close to zero "for a considerable time," the central bank said in its statement. Most economists predict that the Fed won't raise the benchmark, which is used to calculate many consumer and business loans, before mid-2015.

The Fed displayed a cautious optimism regarding job growth at the end of the two-day policy meeting. The statement dropped a previous reference to "significant" in referring to an "underutilization" of available workers.

The U.S. economy has been benefiting from solid consumer and business spending, manufacturing growth and a surge in hiring that's reduced the unemployment rate to a six-year low of 5.9 percent. Still, the housing industry is struggling, and global weakness poses a potential threat to U.S. growth.

Fed Chair Janet Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. These include stagnant pay, many part-time workers who can't find full-time jobs and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.

What's more, inflation remains so low it isn't even reaching the Fed's long-term target rate of 2 percent. When inflation is excessively low, people sometimes delay purchases — a trend that slows consumer spending, the economy's main fuel. The low short-term rates the Fed has engineered are intended, in part, to lift inflation.

Meanwhile, the Fed's decision to end its third round of bond buying, known called quantitative easing, had been expected. It has gradually pared the purchases from $85 billion in Treasury and mortgage bonds each month to $15 billion. And the Fed had said it would likely end the program after its October meeting if the economy continued to improve.

Even with the end of new purchases, the Fed's investment holdings stand at $4.5 trillion — more than $3 trillion higher than when the bond purchases were launched in 2008 at the height of the financial crisis. The Fed has said it won't begin selling its holdings until after it starts raising short-term rates.

The bond-buying program was intended to lower long-term borrowing rates to encourage spending and spur economic growth. The Fed began the purchases after it had cut its main policy tool, the federal funds rate, as low as it could go. The Fed's benchmark short-term rate has been at zero since December 2008.

Supporters have said the bond buying helped invigorate the economy and reduce the unemployment rate, which peaked at 10 percent during 2009, before dropping to the sub 6 percent level today.

Critics contend that the Fed will find it hard to sell its massive holdings without jolting financial markets. They also worry that all the money it has pumped into the economy will eventually ignite inflation and cause dangerous bubbles in assets like stocks or housing.

Al Jazeera and wire services

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