US Fed to scale back asset purchases as economy steadies

The US Federal Reserve on Wednesday announced plans to trim its aggressive bond-buying programme but sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised.

In what amounts to the beginning of the end of its unprecedented support for the US economy, the central bank said it would reduce its monthly asset purchases by $10 billion to total $75 billion. It trimmed equally from mortgage and Treasury bonds.

The move, which could come as a surprise to many investors, was a nod to better prospects for the economy and labor market and marks a historic turning point for the largest monetary policy experiment ever.

The Fed's asset purchase programme, a centerpiece of its crisis-era policy, has left it holding roughly $4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.

The Fed "modestly" reduced the pace of bond buying in light of better labour market conditions, it said in a statement following a two-day policy meeting.

But in a move likely meant to forestall any sharp market reaction that could undercut the recovery, the central bank also said it "likely will be appropriate" to keep rates near zero "well past the time" that the US jobless rate falls below 6.5 per cent. It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5 per cent. The rate stood at 7.0 per cent in November, a five-year low.

The Fed's latest so-called quantitative easing programme, or QE, was launched 15 months ago to kick-start hiring and growth in an economy that was recovering only slowly from the Great Recession. The Fed's first QE programme was launched in the midst of the 2008 financial crisis.

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