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Fed to reduce pace of bond buying by another $10 billion

WASHINGTON – The Federal Reserve says it will cut its monthly bond purchases by an additional $10 billion, to $65 billion, because of a strengthening U.S. economy.

It’s doing so even though the prospect of reduced Fed stimulus and higher U.S. interest rates has rattled global markets.

The Fed also reaffirmed its plan to keep short-term rates at record lows in a statement it issued Wednesday after Ben Bernanke’s final policy meeting. Bernanke will step down Friday after eight years as chairman.

Many global investors fear that reduced Fed bond buying will boost U.S. rates and cause investors to move money out of emerging markets and into the United States for higher returns. Currency values in emerging nations have fallen. India, Turkey and South Africa have raised rates to try to protect their currencies.

Most economists expect a string of $10 billion monthly reductions in bond purchases to be announced at each Fed meeting this year, concluding with a final $15 billion cut in December.

The bond purchases have been intended to keep long-term borrowing rates low to spur spending and growth. The Fed’s decision Wednesday to continue paring its purchases signals its belief that the economy is showing consistent improvement. In its statement, it upgraded it assessment to say “growth in economic activity picked up in recent quarters.”

Stocks fell slightly after the Fed announced its decision. Bond price were little changed.

The Dow Jones industrial average was down 157 points shortly after the Fed made its announcement at 2 p.m. Eastern time; it was down 127 points just before. The yield on the 10-year Treasury note held steady at 2.71 percent.

Some analysts said the Fed’s confidence in the U.S. economy appeared to outweigh any concern that the turmoil in emerging market economies might spill over into the United States and other developed nations. The Fed made no mention of the turbulence that has rocket markets for the past week.

The Fed’s bond purchases have helped fuel a huge stock market rally over the past year as investors shifted money out of low-yielding bonds and into stocks. Now that the Fed is cutting back on those bond purchases, many investors fear stocks will fall.

“Ultimately, the Fed sort of had no choice but to reduce purchases at this meeting,” said Dan Greenhaus, chief strategist at BTIG brokerage. “If they had paused, they risked sending a signal to markets that they lacked conviction.”

Janet Yellen, who will succeed Bernanke on Monday, took part in this week’s Fed meeting in her role as vice chair. Yellen has been closely aligned with Bernanke’s policies.

The action Wednesday was approved on a 10-0 vote.

The Fed’s statement repeated a phrase it first used in December: That it would hold its benchmark short-term rate near zero “well past” the time unemployment falls below 6.5 percent. It is part of the Fed’s effort to reassure investors that it will keep supporting an economy that remains less than fully healthy.

The unemployment rate dipped from 7 percent to 6.7 percent in December, the lowest point in five years. Still, much of the decline was due to an exodus of job seekers who gave up looking for work and were no longer counted as unemployed.

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