Federal Reserve Decides to Cut Stimulus Program

Known as tapering

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Gary Cameron / Reuters

The Federal Reserve announced Wednesday that it plans to scale back its massive program of bond-buying to stimulate the economy, defying economists’ expectations that it would maintain current policy at least until after the New Year.

The central bank’s Open Market Committee said it would cut the bond-buying program by $10 billion to $75 billion, an action known as tapering. Stocks surged after the announcement, and the Dow Jones Industrial Average was 272 points, or about 1.7 percent for the day, late in the afternoon. Though the committee believed the economy and the job market have improved enough to warrant a slight decrease in monetary stimulus, it warned that the unemployment rate “remains elevated.” It also noted that the housing sector has slowed in recent months, and that short-term budget cutting efforts from Congress were slowing the recovery as well.

Outgoing Fed Chairman Ben Bernanke supported the move.

The Fed stressed that it is willing to adjust its purchases in the future either upwards or downwards if economic conditions warrant. In another change, the committee said that it would likely keep short-term interest rates near zero¬†“well past the time that the unemployment rate declines below 6-1/2 percent,” especially if inflation remains muted.

Speaking to reporters after the announcement, Bernanke indicated it’s likely the Fed will continue to pare back stimulus in $10-billion increments in the coming months. “The steps we take will be data dependent. If we’re making progress on inflation and employment we’ll likely do a measured reduction each meeting,” Bernanke said. The Open Market Committee holds eight meetings each year, so a $10 billion per meeting reduction would end the program sometime in late 2014.

Bernanke also fended off questions about whether the central bank is doing enough to reduce unemployment and maintain inflation at the Fed’s target of two percent. “We’re not doing less” to help the labor market recover, he argued, saying that the reduction in purchases is being paired with a promise to keep short-term interest rates near zero for longer than it had previously promised. “I think we’ve been aggressive to keep the economy growing and we’ve seen progress in the labor market.”

The outgoing Fed chair was also unusually critical of Congress’ fiscal policy, blaming short-term budget cuts for some of the struggles the economy has faced in recent years. “People don’t appreciate how tight fiscal policy has been,” he said. Bernanke pointed out that overall government employment has fallen by hundreds of thousands of jobs since the beginning of the recession.

He did have a few kind words for the latest budget deal however, praising the fact that it traded short-term budget increases with longer-term budget cuts, a strategy that he has pushed for numerous times in the past. Bernanke also praised the fact that a government shutdown was avoided with relative ease this time around. “It’s a good thing [Congress] is working cooperatively and making progress,” he said.