The central bank said it will continue to pump $75 billion a month into the economy and markets through purchases of Treasury bonds and mortgage-backed securities, but the change nevertheless marked the first time since the Great Recession that the U.S. central bank has felt confident enough to move toward ending its extraordinary cash infusions.
Despite widespread expectation that the Fed would wait until next year to change course, the U.S. stock market took the move in stride, viewing it as confirmation that the economy is poised to move into a higher gear next year. The Fed also countered the shock of the move somewhat by indicating it will hold interest rates lower for a longer time after it ends its bond-purchase program.
The Dow Jones industrial average surged 293 points after the Fed’s md-afternoon announcement and ended in record territory at 16,168. The Standard & Poor’s 500 index also soared to a record as investors celebrated what appears to be the beginning of a successful conclusion of the Fed program.
“The reason the stock market is up as it is — this is ‘bad news’ investors have been waiting for and is finally out of the way,” wrote Erik Davidson, deputy chief investment officer, Wells Fargo Private Bank, San Francisco
The change represents the final say by Fed Chairman Ben S. Bernanke, who is due to be replaced by Fed Vice Chairman Janet Yellen at the end of next month after she is confirmed by the Senate. At a news conference, Mr. Bernanke said Ms. Yellen fully supported the earlier-than-expected start of the so-called “tapering” of the Fed’s asset purchase program.
Briefing reporters for one last time as chairman, Mr. Bernanke seemed pleased that he can retire after eight years at the Fed’s helm having accomplished what he set out to do: steer the economy out of a deep global recession and bring down unemployment to a more normal range around 7 percent, which allows the Fed to go back to more normal interest rate policies. The Fed is aiming for unemployment to ultimately fall into the 5 percent range.
“I’m pretty comfortable with the fact that this program did in fact create jobs” and accomplished what it was intended to do, he said.
If economic reports show the economy continues to improve and jobs are created at the recent pace of about 200,000 a month next year, the Fed likely will continue scaling back its bond purchases by about $10 billion a month next year, he said, although it could accelerate the tapering or slow it depending on how the economy performs.
While the economy has grown slowly since it started recovering in mid-2009, Mr. Bernanke said it has done surprisingly well considering all the obstacles it had to overcome, including a European financial crisis, the worst housing bust since the Great Depression, and unprecedented large budget cuts and layoffs by all levels of the government.
He noted that at this point in previous economic recoveries, state and local governments had hired 500,000 new workers, contributing to the recovery. But in the current recovery, they have laid off 600,000 employees, posing a significant drag to the economy. The federal government also has eliminated close to 100,000 jobs in the last year.
“Given all the things we faced, it’s not surprising in retrospect that the recovery has been so tepid,” he said. “Compared to Japan and other industrialized economies, the U.S. recovery has been better than most.”
Mr. Bernanke applauded Congress’ approval of a bipartisan budget deal that reverses some budget cuts scheduled for next year and replaces them with long-term reforms in military and federal pension programs, saying that moved in the right direction. He has frequently urged Congress to focus on long-term deficit problems rather than imposing short-term budget cuts that hurt the recovery.
“There’s a lot more work to be done, I have no doubt,” in reducing the budget deficit, he said, but “even if the outcomes are small as this one was, it’s a good thing that they’re acting cooperatively and making some progress.”
The easing of fiscal tensions and partisan discord signaled by the budget agreement played a role in the Fed’s decision to start tapering earlier than expected. Many economists had predicted the Fed would wait until next year to see the outcome of Congress’s latest battles over the budget, but the bipartisan deal signaled that budget matters will be handled with fewer disruptions in the future.