Fed to reduce pace of bond buying by another $10B
WASHINGTON – The Federal Reserve is pushing ahead with a plan to shrink its bond-buying program because of a strengthening U.S. economy. It’s doing so even though the prospect of reduced Fed stimulus and higher U.S. interest rates has rattled global markets.
The Fed said it will cut its monthly bond purchases starting in February by $10 billion to $65 billion. It also reaffirmed its plan to keep short-term rates at record lows to try to reassure investors that it will keep supporting an economy that remains less than fully healthy.
The decision by the Fed was announced in a statement Wednesday after Ben Bernanke’s final policy meeting. Bernanke will step down Friday after eight years as chairman and will be succeeded by Vice Chair Janet Yellen.
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.
Many global investors fear that reduced Fed bond buying will boost U.S. 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. These central banks hope to control inflation, boost their flagging currencies and keep investors from fleeing.
But so far, those currencies have continued to weaken.
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 it assessment to say “growth in economic activity picked up in recent quarters.”
Stocks fell after the Fed announced its decision. Bond prices rose slightly, and their yields dipped.