The euphoria surrounding tapering of U.S stimulus throughout the last week or so has culminated in the Federal Reserve taking the risky step of beginning the winding down process. The Central Bank refrained from taking any exuberant steps, instead deciding to trim the pace of its monthly asset purchases by $10billion to $75 billion. Policy makers have cited considerable strength in the U.S economy as a key reason behind the scaling down process, with a sustained recovery now in sight.
Fed Chairman Bernanke made clear at his last conference that asset purchases would be cut at a measured pace through much of next year if job gains continued as expected. Consequently, the move to taper will be seen as a clear sign that the economy and labour markets have continued to improve. In a move that will hopefully calm investors in such a volatile period, the Federal Reserve suggested that its key interest rate would stay at rock bottom even longer than previously promised.
The Fed launched its third and latest round of quantitative easing, or QE, 15 months ago to kick-start hiring and growth in an economy recovering only slowly from the recession. Its first program was launched during the 2008 financial crisis. The Fed has held rates near zero since late 2008.
Bernanke said he consulted closely on the decision with Fed Vice Chair Janet Yellen, who is set to succeed him once he steps down on January 31st after eight years at the helm. Investors took the action as a validation that the outlook for the economy was improving. After a brief pullback, U.S. stocks rallied sharply, with both S&P 500 and Dow industrials closing at all-time highs.