Fed pulls back on stimulus

The Federal Reserve announced Wednesday it would begin rolling back its stimulus for the economy, cutting the amount of bonds it purchases every month by $10 billion.

The Federal Open Market Committee announced it was ready to “modestly reduce” the size of its bond purchases at the end of its policy meeting.

{mosads}The central bank had been buying $85 billion in bonds every month. Beginning in January, it will buy $35 billion in mortgage bonds and $40 billion in Treasury debt.

The Fed said it decided to begin rolling back its stimulus due to “cumulative progress” towards maximum employment and the improved outlook of the labor market.

“The committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy,” the Fed said in a policy statement.

Fed Chairman Ben Bernanke, in what could be his final press conference as the institution’s leader, said the bank was ready to cut back its economic support because the recovery is well underway and unemployment is falling.

“We expect economic growth to be strong enough to support further job gains,” he said.

He added that if the economy continues to improve as expected, the Fed would likely continue to lower the size of its purchases at each policy meeting, with the goal of halting those buys altogether towards the end of 2014.

Traders took the announcement in stride. Stocks surged after the announcement, as the Dow Jones Industrial Average ended the day up nearly 300 points.

The decision to begin tapering the stimulus was widely expected, and comes after a solid run of positive economic data.

The economy added more jobs and the unemployment rate fell to 7 percent in November, further than expected and to a lower rate than before President Obama’s election.

That report came on the heels of a similarly strong October report, and findings that the economy grew by 3.6 percent in the third quarter of the year, higher than originally estimated.

The run of strong data appears to have convinced the Fed the economic recovery was stable enough that it could begin to remove its support, as the institution faced growing concern about the implications of its now $4 trillion balance sheet.

New economic projections the Fed released along with its policy update revealed bank officials have grown more confident about the economy in the near future. Expectations for economic growth and unemployment both improved slightly, while inflation expectations remained in line with the Fed’s goals.

Bernanke emphasized that Fed officials will still be keeping a close eye on economic data in the coming months, and will adjust its wind-down accordingly.

“Asset purchases are not on a preset course,” he said, calling the slowdown “deliberate and data-dependent.”

Furthermore, Bernanke said his apparent successor, Fed Vice Chair Janet Yellen, is completely on board with the approach. Yellen is expected to be confirmed by the Senate this week.

“I have always consulted closely with Janet,” he said. “She fully supports what we did today.”

The Fed had been undergoing its third round of “quantitative easing” since September 2012. Under the latest version of the stimulus program, the central bank was buying up $85 billion of bonds each month, in an effort to further lower borrowing rates and spur on the economy.

The decision to begin to taper the purchases comes as Bernanke nears the end of his historic tenure at the Fed. Since taking over the central bank in 2006, he has steered through an epic financial crisis, and then pushed the Fed into uncharted territory with novel efforts to prop up an ailing economy.

Those efforts have garnered sharp criticism from congressional Republicans.

Rep. Kevin Brady (R-Texas), who heads the Joint Economic Committee, was concise in his reaction to the Fed’s decision to slow its stimulus.

“It’s about time,” he said in a statement.

This story was updated at 2:29 p.m. and 4:30 p.m.