The US central bank on Wednesday said it will reduce its $85 billion a month in bond purchases by $10 billion starting in January 2014. For a change, markets rallied after the Fed announcement and the Dow Jones Average ended at a record high, registering its best day in two months.
Here are 10 things to know about the QE taper:
1.The Fed has decided to reduce the quantum of bond buying per month from the next year. So, it would reduce its monthly asset purchases by $10 billion to total $75 billion. Chairman Ben Bernanke said the Fed will take "similar moderate steps" throughout next year to reduce the purchases further if the economy shows continued improvement.
2.Though the Fed will cut back on bond purchases, it plans to hold its key short-term rate near zero at least until unemployment falls below 6.5 per cent. Fed's outlook on rates was interpreted as more dovish than expected leading to a rally in stock markets. (Read more)
3.The immediate trigger for the Fed's decision to taper its massive bond buying was a recovery in the US job market, Bernanke said. The Fed predicts the unemployment rate in the US will dip as low as 6.3 per cent next year and 5.8 per cent in 2015. It's now at a five-year low of 7 per cent.
4.The bond buying, also known as the quantitative easing program, or QE, was launched 15 months ago to kick-start hiring and growth in the US economy, which was recovering slowly from the Great Recession. The Fed's first QE program was launched in the midst of the 2008 financial crisis.
5.The QE helped keep long-term interest rates low to encourage more borrowing and spending in the US. Wednesday's decision signals better prospects for the US economy and labour market. The Fed estimates that economic growth will be between 2.8 per cent and 3.2 per cent next year as against 2 per cent in 2013.
6.Bernanke blamed the slow recovery in the US economy to extensive damage from the housing bust and tight budgets at all levels of government. He also blamed the anemic pace of the recovery on "some bad luck", saying Europe's debt troubles slowed the global economy at a critical time. (What Bernanke said)
7.The asset purchases by the Fed have stoked anxiety that they could unleash inflation or fuel hard-to-detect asset price bubbles. Even some within the Fed have worried the bond purchases could have unintended and economic costly effects.
8.The unprecedented money-printing has helped drive stock markets in the US and many other countries to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets this year as investors anticipated an end to the easing.
9.The Fed policy meeting was the penultimate one of Bernanke's tenure. His second four-year term as chairman of the central bank expires on January 31, just two days after the close of the Fed's first policy meeting of 2014.
10.Janet Yellen, the Fed's vice chair and a strong proponent of the Fed's aggressive response to the recession, is positioned to succeed Bernanke. The US Senate is expected to vote to confirm her for the post by the end of this week. Chairman Bernanke said Yellen "fully supports" the Fed's decision to slow its bond purchases.