Fed to slow economic stimulus

The Federal Reserve announced Wednesday it would start reducing purchases of government-backed bonds in January by 10 billion dollars, (7.3 billion euros) to 75 billion dollars a month.

The decision, which came after a two-day monetary policy meeting, marks the beginning of the end of a stimulus policy designed to boost economic activity and lower unemployment in the wake of the global recession.

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the [monetary policy] committee decided to modestly reduce the pace of its asset purchases," the central bank said in a statement.

It signaled that if the job market gradually continued to improve and currently muted inflation did not slip toward deflation, the Fed would "likely reduce the pace of asset purchases in further measured steps at future meetings."

No let-up in Fed support

In a news conference Fed Chairman Ben Bernanke (pictured above) was careful to stress the announcement did not equate to a reduction in the Fed's commitment to economic growth. He said it would continue to bolster the economy indefinitely.

"We're not doing less," Bernanke said. "We have been aggressive to keep the economy growing."

"I want to emphasize that we are going to be data-dependent. We could stop purchases if the economy disappoints. We could pick them up somewhat if the economy is stronger."

Of the 10-billion-dollar reductions, five billion will come from its monthly US Treasury purchases. There will be a further five billion-dollar reduction in its purchases of mortgage-backed securities, the Fed said.

The central bank also pledged to maintain current interest rates which have been set near zero since December 2008 in order to support recovery. The central bank said the current rate would likely remain unchanged "well past the time" that the unemployment rate declines below 6.5 percent. Unemployment is now at 7 percent.

Stocks rallied at the news, with the Dow Jones Industrial Average soaring 1.84 percent to finish at 16,167.97, while the broader Standard & Poor's 500 jumped 1.66 percent to 1,810.65.

Bernanke is due to step down as chairman on January 31 and be succeeded by Vice Chair Janet Yellen. The Senate is expected to confirm her nomination as soon as this week.

ccp/av (AFP, dpa, AP)