Fed says stimulus taper is modest, plans to keep rates low longer

WASHINGTON -- Federal Reserve officials Wednesday described their pullback on a key stimulus program as modest, and at the same time sought to allay any concerns about the central bank’s efforts to boost growth by promising to keep short-term interest rates low longer that it has signaled before.

The decision to reduce the Fed’s $85 billion in monthly bond purchases by $10 billion, starting in January, was warranted because of improving labor market conditions, the Fed said in a statement after a two-day policymaking meeting.

With the unemployment rate down to 7% in November and the economy adding an average of 204,000 net new jobs over the past four months, members of the Federal Open Market Committee decided it was time for a small tapering of the bond purchases, officials said.

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Analysts had said it was a toss-up whether the Fed would vote to taper at the meeting, and those who thought it would predicted the reductions would be small.

The Fed said it would reduce its purchases of mortgage-backed securities to $35 billion a month, from $40 billion, and reduce its purchases of Treasury securities to $40 billion, from $45 billion.

The Fed said it likely would reduce the pace of bond buying “in further measured steps at future meetings” if the labor market continues to improve and the low inflation rate moves up toward the central bank’s annual target.

The stimulus program began in September 2012 and has helped swell the Fed’s balance sheet to about $4 trillion.

The vote on reducing the bond purchases was 9-1. Eric Rosengren, president of the Federal Reserve Bank of Boston dissented, saying he believes the reduction is premature given the “still elevated” unemployment rate.

But at the same time as it began tapering its bond purchases, the Fed assured financial markets it would keep its short-term interest rate at near zero, where it has been since December 2008, until “well past the time” that the unemployment rate drops below 6.5%.

The Fed in the past has said it would hold rates low as long as the unemployment rate was above 6.5%.

By the Fed’s most recent projections, the unemployment rate would drop to no lower than 6.3% by the end of 2014, and might not be well below the target level until 2015.

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