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'The Fed exit has begun' on QE pace; Outlook prompts $10B trim.

Byline: Joshua Zumbrun

The Federal Reserve is trimming its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.

"Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,'' Bernanke said at a press conference in Washington, D.C., Wednesday after a meeting of the Federal Open Market Committee.

Bernanke, in the final weeks of his eight-year tenure, is curtailing the purchases that swelled the Fed's balance sheet almost to $4 trillion as he sought to put millions of jobless Americans back to work.

Stocks rallied, sending benchmark indexes to all-time highs, as the Fed coupled its decision to taper with a stronger commitment to keep its key interest rate low. The Standard & Poor's 500 Index added 1.7 percent to 1,811.07 at 4 p.m. in New York. Ten-year Treasury notes pared losses, with yields rising five basis points to 2.89 percent after climbing as much as nine points.

"The steps that we take will be data dependent,'' Bernanke said. "If we're making progress in terms of inflation and continued job gains, then I imagine we'll continue to do, probably at each meeting, a measured reduction'' in purchases.

If the economy slows, the Fed could "skip a meeting or two,'' and if the economy accelerates it could taper a "bit faster,'' he said.

Low rate

At the same time, the Fed reinforced its assurances that it's a long way from raising borrowing costs, saying that its benchmark rate is likely to stay low, "well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below'' the Fed's 2 percent goal.

"The action today is intended to keep the level of accommodation the same overall and to push the economy forward,'' Bernanke said. "We are committed to doing what is necessary to getting inflation back to target.''

The Fed's purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds starting in January, Bernanke said.

Boston Fed dissent

"The Fed exit has begun and the economy will guide how quickly they continue to cut back their stimulus,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "They changed the direction of policy today, and once they started this step, history tells you, they won't reverse it.''

Boston Fed President Eric Rosengren dissented, saying that changes on the bond-purchase program were "premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.''

Janet Yellen, the Fed's current vice chairman and President Barack Obama's nominee to succeed Bernanke, voted in favor of the policy action.

Bernanke said he has "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.''

Signs of strength

Policymakers met amid signs the economy and labor market were gaining strength, even as inflation remained subdued.

The jobless rate fell to 7 percent in November, a five-year low, as employers added a greater-than-forecast 203,000 workers to payrolls. Unemployment was down from 10 percent in October 2009, during the recession, and up from 4.4 percent in May 2007.

Retail sales climbed by the most in five months in November, a sign that consumer spending was strengthening as the holiday season began. Industrial production last month increased by the most in a year, a Fed report showed this week.

Companies including Ford Motor Co. are benefiting from rising demand for new cars. Ford said this month it plans to add 5,000 jobs in the U.S. and will introduce 16 new vehicles in North America next year. The payroll expansion will continue following the hiring of almost 6,500 people in 2013.

Stocks have surged on stronger corporate earnings and continued Fed stimulus. The S&P 500 is up 27 percent for the year.

The Fed's low interest rates have prompted consumers to buy homes or refinance existing mortgages, sparking a recovery in the housing market that was at the center of the financial crisis.

Housing prices climbed 13.3 percent in the 12 months through September, according to an S&P/Case-Shiller index of prices in 20 cities. The pace of home construction reached a more than five-year high in November as builders added to inventory to keep pace with demand, a report from the Commerce Department showed Wednesday.

Growth so far has lagged behind previous recoveries.

In the 17 quarters since the recession ended, the economy has expanded at an average annualized rate of 2.3 percent each quarter. That compares with an average of 3.2 percent over the same period following the 2001 and 1991 recessions, and 5 percent following the 1982 recession.

"We have been disappointed in the pace of growth and we don't fully understand why'' it has been slow, Bernanke said Wednesday.
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Title Annotation:Business
Author:Zumbrun, Joshua
Publication:Telegram & Gazette (Worcester, MA)
Date:Dec 19, 2013
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