WASHINGTON, (Reuters) – The Federal Reserve yesterday decided to trim its bond purchases by another $10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.
The action was widely expected, although some investors had speculated that the U.S. central bank might put its plans on hold given the jitters overseas.
Fed Chairman Ben Bernanke, who hands the Fed’s reins to Vice Chair Janet Yellen tomorrow, managed to adjourn his last policy-setting meeting without any dissents from his colleagues. It was the first meeting without a dissent since June 2011 – a sign of how tumultuous Bernanke’s tenure has been. In addition to proceeding with plans to scale back its bond buying, the Fed made no changes to its other main policy plank: its pledge to keep interest rates low for some time to come.
The decision suggests that it would take a serious threat to the U.S. economy before the Fed backs down from a resolve to shelve the asset-purchase program later this year.
Indeed, it offered a somewhat rosier assessment of the U.S. economy’s prospects than it did last month, saying “economic activity picked up in recent quarters.” It also largely shook off surprisingly soft jobs growth in December. “Labor market indicators were mixed but on balance showed further improvement,” it said.
“They really want to move to the sidelines here and get out of the (bond buying) business,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
All 17 top Wall Street economists polled by Reuters on Wednesday expect the Fed to wind the program down by year’s end, and nearly all believe the Fed won’t raise rates until at least the third quarter of 2015.
Major U.S. stock indexes closed down more than 1 percent, while yields on the benchmark 10-year Treasury note hit the lowest level since late October. The dollar rose against the euro but was little changed against a broad basket of currencies.
Importantly, the Fed stuck to its promise to keep rates near zero until well after the U.S. unemployment rate, now at 6.7 percent, falls below 6.5 percent, especially if inflation remains below a 2 percent target. Some analysts had speculated it might alter this guidance, given how close the jobless rate now is to the rate-hike threshold.
In fact, the central bank’s statement largely mirrored the one it issued after its Dec. 17-18 meeting, when it announced an initial $10 billion cut to its monthly bond purchases.
