Fed to reduce US stimulus

A trader works on the floor of the New York Stock Exchange on January 2, 2013 in New York City.

What you need to know:

  • The Federal Reserve has announced it will start tapering its massive stimulus programme in January, giving a vote of confidence in the recovery of the US economy and job market.
  • Stocks rallied to new record highs after the notice that marked the beginning of the end of five years of its easy-money policy, aimed at helping the world’s largest economy recover from the devastating recession.
  • The FOMC said it would likely keep the current rate “well past the time” that the unemployment rate declines below 6.5 per cent.

WASHINGTON, Thursday

The Federal Reserve has announced it will start tapering its massive stimulus programme in January, giving a vote of confidence in the recovery of the US economy and job market.

The Fed will buy $75 billion (Sh6.3 trillion) on bonds a month next month, down from the $85 billion (Sh7.2 trillion) monthly asset purchases it has made for a year, the Federal Open Market Committee said after a two-day monetary policy meeting.

Stocks rallied to new record highs after the notice that marked the beginning of the end of five years of its easy-money policy, aimed at helping the world’s largest economy recover from the devastating recession.

OUTLOOK FOR LABOUR MARKET

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the FOMC said in a statement.

The Fed said it would pare $5 billion (Sh425 billion) off monthly purchases of Treasuries and $5 billion off purchases of mortgage-backed securities and likely would take “further measured steps at future meetings” if the economy continues to improve.

On Wall Street, the Dow Jones Industrial Average soared 1.84 per cent to finish at 16,167.97, while the broad-based S&P 500 jumped 1.66 per cent to 1,810.65.

The central bank, as widely expected, held its key federal funds interest rate at 0-0.25 per cent, where it has been for five years to support the recovery.

With its main rate tool near zero, the bank has used unprecedented large-scale asset purchases in an effort to tamp down long-term interest rates to stimulate growth and job creation.

The FOMC said it would likely keep the current rate “well past the time” that the unemployment rate declines below 6.5 per cent.

That marked an extension of time for the supportive ultra-low rate from previous guidance.

“By putting more conditions on its first increase in short-term interest rates, the Fed shifted market expectations for this from mid-2015 to later that year or possibly early 2016.

This should put downward pressure on long-term rates,” Moody’s Analytics Ryan Sweet said.

Noting the fiscal drag of the federal government’s tax hikes and spending cuts on growth since the start of the current bond-buying programme, the FOMC said it saw the improvement in the economy and labour market as evidence of “growing underlying strength in the broader economy.” (AFP)