January 30

Fed cuts back on stimulus bond buying

The Federal Reserve’s decision to continue paring its purchases signals its belief that the economy is showing consistent improvement.

By Martin Crutsinger
The Associated Press

WASHINGTON — Given the U.S. economy’s growing strength, the Federal Reserve pushed ahead Wednesday with a plan to shrink its bond-buying program, even though the prospect of a reduced stimulus and higher interest rates has rattled global markets.

click image to enlarge

Federal Reserve Chairman Ben Bernanke presided over his final policy meeting Wednesday. He will step down Friday.

2012 Associated Press File Photo

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Trader William McInerney, left, works on the floor of the New York Stock Exchange on Wednesday. Weak earnings from several U.S. companies dented investors’ confidence, which then dipped even lower after the Fed announced it was scaling back stimulus bond buying.

The Associated Press

The central bank said it will cut its monthly bond purchases starting in February by $10 billion to $65 billion. It also reaffirmed a plan to keep short-term rates at record lows to try to reassure investors that it will keep supporting an economy that’s stronger than at any point since the recession yet remains less than fully healthy.

The Fed’s decision came in a statement after the final policy meeting of Ben Bernanke, who will step down Friday after eight years as chairman. He will be succeeded by Vice Chair Janet Yellen.

Most economists expect that under Yellen, the Fed will announce a string of $10 billion monthly reductions in bond purchases at each meeting this year, concluding with a final $15 billion cut in December. Still, if the American economy were to falter, the Fed has stressed that it might suspend its pullback in bond buying so it could keep aggressively holding down long-term loan rates.

Many global investors fear that reduced Fed bond buying will raise U.S. interest rates and cause investors to move money out of emerging markets and into the United States for higher returns. Currency values in emerging economies have fallen over that concern.

In response, central banks in emerging economies, from India to Turkey to South Africa, have been acting to counter any damage from the Fed’s pullback and the prospect of higher U.S. rates. They’ve been raising their own rates, hoping to control inflation, boost their flagging currencies and keep investors from fleeing.

But so far, those currencies have continued to weaken.

The Fed’s bond purchases have been intended to keep long-term borrowing rates low to spur spending and growth. Its decision Wednesday to continue paring purchases signals the Fed’s belief that the economy is showing consistent improvement. In its statement, it upgraded its assessment to say “growth in economic activity picked up in recent quarters.”

On Thursday, the government will issue its first estimate of economic growth in the October-December quarter. Analysts have estimated that the economy grew at a solid 3.3 percent annual rate last quarter after an even stronger 4.1 percent annual rate from July through September.

Still, stocks fell after the Fed announced its decision. That was in part because of disappointing earnings from big U.S. companies and the jitters in emerging markets.

The Dow Jones industrial average closed down 189 points. It had been down 127 points just before the Fed’s announcement. Disappointing earnings from big U.S. companies contributed to a sour mood on Wall Street. The yield on the 10-year Treasury note slipped to 2.68 percent.

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