WASHINGTON — The Federal Reserve announced Wednesday the beginning of the end for a controversial bond-buying program in support of the U.S. economy, a signal of an improving recovery that sent stocks soaring at the close of trading.
Starting in January, the Fed will begin tapering back by $10 billion a month its $85 billion a month in bond-buying that began in December 2012. Fed Chairman Ben Bernanke said that the taper could continue with each successive meeting.
“My expectation is for similar moderate steps going forward throughout most of 2014,” Bernanke said, cautioning, “I want to emphasize that we are going to be data-dependent.”
The Fed also issued new guidance for when, and under what conditions, it might begin to raise its benchmark interest rate that influences borrowing costs in the economy. The short answer is not anytime soon.
“It’s a dovish taper,” said Mark Zandi, chief economist for forecaster Moody’s Analytics, adding that the Fed effectively backed away from its earlier target of an unemployment rate of 6.5 percent as a milepost for when interest rates might rise in the economy. “The Fed is on track to end (stimulus) by the fall of 2014 and begin raising interest rates by the fall of 2015.”
Bernanke’s guidance suggested the Fed wants to go “well past” the time the unemployment rate, now at 7 percent, reaches 6.5 percent. That’s something most Fed members think could happen late next year. Three members, he said, didn’t expect interest rates to begin their first climb until 2016. Those developments sent glee across Wall Street. Stocks surged Wednesday, lifting the Dow Jones industrial average nearly 300 points to another record.
The purchases of government and mortgage bonds were designed to spark more risk taking and thus more activity in the economy. The idea is that the purchases of safe bonds drive down their return to investors, making riskier assets like stocks more attractive. While easing the stimulus, the Fed isn’t completely removing support. In addition to buying $75 billion a month in bonds, it’s also buying bonds by reinvesting principal payments from its holdings.