Federal Reserve To Cut Stimulus By $10 Billion A Month

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Federal Reserve policymakers surprised many in the financial markets Wednesday with a decision to begin the so-called "taper." The Fed will cut the amount of its stimulus by $10 billion a month. The stock market pushed higher on the news.


From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.


And I'm Audie Cornish.

We begin this hour with an announcement from the Federal Reserve. With the economy looking up, policymakers said today that they'll begin to wind down their $85-billion-a-month stimulus program. And surprisingly, the news sent the stock market soaring. That's partly because, as NPR's John Ydstie reports, outgoing chairman Ben Bernanke reassured markets that the Fed will continue to support the economy in other ways.

JOHN YDSTIE, BYLINE: In his final news conference, Chairman Bernanke said the Fed was going to begin dialing back its stimulus because the program has worked. He told reporters the Fed had promised when it began the bond-buying stimulus program last September that it would continue until the job market improved substantially.

BEN BERNANKE: Since then, we've seen meaningful cumulative progress in the labor market. For example, since we began the current purchase program, the economy has added about 2.9 million jobs and the unemployment rate has fallen by more than a percentage point to 7 percent.

YDSTIE: Next month, the Fed will shave $10 billion off its stimulus program. It currently purchases $85 billion each month in long-term government bonds and mortgage-backed securities. In the statement following their meeting, Fed officials said as long as the economy and employment keep improving, the Fed will continue reducing its purchases and finally end them. Bernanke said there's clear evidence the asset purchases have worked.

BERNANKE: Asset purchases brought down long-term interest rates, brought down mortgage rates, brought down corporate bond yields, brought down car loan interest rates. And we've seen a response in those areas as the economy has done better.

YDSTIE: But while he pointed to a brightening recovery, Bernanke argued the economy still needs help and the Fed is not really pulling back. He pointed to the other decision by Fed policymakers that will keep short-term interest rates low even longer than they had previously said. And the rates will remain low well past the time the unemployment rate reaches 6.5 percent as the Fed assesses other majors like hires and quits and labor market participation.

BERNANKE: I expect it will be some time past the 6.5 percent before all of the other variables that we're looking at will line up in a way that will give us confidence that the labor market is strong enough to withstand the beginning of increases in rates.

YDSTIE: The prospect of continuing Fed support appeared to reassure the stock market, which has tanked during previous periods when the Fed appeared ready to reduce its bond-buying program. Instead of dropping, the market soared to record levels. Bernanke will be leaving at the end of January. He was asked if his successor, the Fed's current vice chair, Janet Yellen, is in agreement with today's moves.

BERNANKE: I have always consulted closely with Janet, even well before she was named by the president, and I consulted closely with her on these decisions as well. And she fully supports what we did today.

YDSTIE: As Bernanke emphasized that today's moves were not really reducing the Fed's support for the economy, he was also trying to reassure those who fear that inflation is too low and could undermine growth.

BERNANKE: We are very committed to making sure that inflation does not stay too low, and we are continuing to monitor that very carefully and to take whatever action is necessary to achieve that.

YDSTIE: Bernanke was also asked to reflect on his tumultuous eight years as the Fed chairman. He arrived in 2006, just before the financial crisis. As for regrets, Bernanke says he was too slow to recognize the financial crisis and wishes he had done so sooner. But he also said that because of financial system reform, the system is safer now than it was back then. John Ydstie, NPR News, Washington.

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