The US Federal Reserve said it would continue to reduce its bond buying stimulus program by $10 billion a month and will keep interest rates extraordinarily low for as long as required.
Ongoing turmoil in emerging markets had led some investors to speculate the Fed might consider amending the “tapering” of its stimulus measures, but the central bank stuck to its guns.
“The Fed's action today represents a continuation of its resolute determination to end (bond purchases) during 2014,” Daniel Alpert, managing partner at Westwood Capital in New York, told Reuters. “The policy has hit its 'sell by' date.”
The Fed's unconventional bond buying — sometimes called “quantitative easing” — has helped boost stock markets for some time and has helped keep interest rates unusually low to help the American economy recover.
The Dow Jones Industrial Average, which was down roughly 0.8 percent before the Fed's announcement, fell further after the news and closed down about 1.19 percent.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to make a further measured reduction in the pace of its asset purchases,” said the Federal Open Market Committee in its statement.
The FOMC said that from February it will buy mortgage-backed securities at a pace of $30 billion a month rather than $35 billion, and will buy longer-term Treasury securities at a pace of $35 billion per month instead of $40 billion.
The committee's decision was unanimous and the meeting is Ben Bernanke's last as chairman of the Fed before Janet Yellen takes up the top job.
Under Bernanke, the Fed built up a $4 trillion balance sheet in an unconventional bond-buying program aimed at keeping interest rates near zero to help the US economy recover.
But concerns over the size of that balance sheet led the Fed to start “tapering” its purchases.
It has been expected the Fed would reduce its monthly bond purchases by $10 billion every month from now on until it ceases the program entirely at the end of 2014.
However, the FOMC said in its statement that further “tapering” will depend on economic conditions.
“If incoming information broadly supports the committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings,” the statement said.
“However, asset purchases are not on a preset course, and the committee's decisions about their pace will remain contingent on the committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”
On interest rates, the committee said it expects that the current near zero federal funds rate will be appropriate at least as long as US unemployment remains above 6.5 percent, and possibly longer.
It added: “The Committee continues to anticipate… that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the committee's 2 percent longer-run goal.”