Wednesday, December 18, 2013

Fed to taper in January

WASHINGTON (AP) - The Federal Reserve has decided to reduce its stimulus for the U.S. economy because the job market has shown steady improvement. The shift could lead to higher long-term borrowing rates for individuals and businesses.

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 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 monthly bond purchases if economic improvements continue.

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 intended 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.

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 slight amount by which it's paring its bond purchases.

The Dow Jones soared about 240 points, well over 1 percent. Bond prices rose, too, and the yield on the 10-year Treasury note dipped from 2.88 percent to 2.84 percent.

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