Federal Reserve will reduce bond purchases by $10B in January 2014

by JJ Cheng 19 Dec 2013

The Federal Reserve has decided to reduce its stimulus for the U.S. economy because the job market has shown steady improvement. The Fed will trim its $85 billion a month in bond purchases by $10 billion starting in January 2014.

The Fed said it could further reduce the pace of its purchases next year if the improvement continues. The shift could lead to higher long-term borrowing rates for individuals and businesses.

At the same time, the Fed strengthened its commitment to record-low short-term rates. It said it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.

The Fed's reduction to $75 billion a month in bond purchases is a small but significant step. It means Fed policymakers are ready to ease the extraordinary support they've provided to the economy since the Great Recession began six years ago.

The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

Fed officials still project US economic growth of roughly 3 percent next year. But they are slightly more optimistic about unemployment, predicting it could fall as low as 6.3 percent in 2014, down from a low of 6.4 percent forecast in September.

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