Federal Reserve to embark on tapering

Washington - The US Federal Reserve announced plans to trim its aggressive bond-buying programme on Wednesday but sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised.

In what amounts to the beginning of the end of its unprecedented support for the US economy, the central bank said it would reduce its monthly asset purchases by $10bn to total $75bn.  It trimmed equally from mortgage and Treasury bonds.

The move, which could come as a surprise to many investors, was a nod to better prospects for the economy and labour market and marks a historic turning point for the largest monetary policy experiment ever.

Bond buying

The Fed's asset purchase programme, a centrepiece of its crisis-era policy, has left it holding roughly $4trn of bonds, and the path it must follow in dialling it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.

The Fed "modestly" reduced the pace of bond buying in light of better labour market conditions, it said in a statement following a two-day policy meeting.

But in a move likely meant to forestall any sharp market reaction that could undercut the recovery, the central bank also said it "likely will be appropriate" to keep rates near zero "well past the time" that the jobless rate falls below 6.5%. .

It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5%. The rate stood at 7% in November, a five-year low.

Inflation

The Fed's latest so-called quantitative easing programme, or QE, was launched 15 months ago to kick-start hiring and growth in an economy that was recovering only slowly from the Great Recession.

The Fed's first QE program was launched in the midst of the 2008 financial crisis.

Fed chairperson Ben Bernanke, whose term expires at the end of January, will explain the Fed's thinking at a news conference later on Thursday.

Meanwhile, the Fed lowered its expectations for both inflation and unemployment over the next few years, acknowledging the faster-than-expected drop in joblessness to a five-year low of 7% last month. It expects the unemployment rate to fall to 6.3% to 6.6% by the end of 2014, from a previous prediction of 6.4% to 6.8%, according to the central tendency of policymakers.