By MARTIN CRUTSINGER
WASHINGTON — The Federal Reserve decided to reduce its stimulus for the U.S. economy because the job market has shown steady improvement. The shift could lead to higher long-term borrowing rates for individuals and businesses.
The Fed’s decision amounts to a vote of confidence in the economy six years after the Great Recession struck. It signals the Fed’s belief the U.S. economy is finally achieving consistent gains.
The central bank said in a statement after its policy meeting ended Wednesday it will trim its $85 billion a month in bond purchases by $10 billion starting in January. At a news conference afterward, Chairman Ben Bernanke said the Fed expects to make “similar moderate” reductions in its purchases if economic improvements continue.
At the same time, the Fed strengthened its commitment to record-low short-term rates. It said it plans to keep 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 intends its bond purchases to drive down borrowing rates by increasing demand for the bonds. The idea has been to induce people and businesses to borrow, spend and accelerate economic growth. The prospect of a lower pace of purchases could mean higher rates.
Nevertheless, investors appeared pleased by the Fed’s finding the economy has steadily strengthened, by its firmer commitment to low short-term rates and by the only slight amount by which it’s paring its bond purchases.
The Dow Jones industrial average soared more than 275 points, well more than 1 percent. Bond prices fluctuated but by late afternoon, the yield on the 10-year Treasury note was unchanged at 2.88 percent.
The Fed’s move “eliminates the uncertainty as to whether or when the Fed will taper and will give markets the opportunity to focus on what really matters, which is the economic outlook,” said Roberto Perli, a former Fed economist who is now head of monetary policy research at Cornerstone Macro.
But Perli noted the Fed has hardly withdrawn its support for the economy. It will continue to buy bonds every month to keep long-term rates down and remains strongly committed to low short-term rates. By keeping interest rates historically low, the Fed “will continue to remain very supportive of risky assets,” Perli said.
The economy is improving consistently, and the Fed is “now recognizing the trend and decided to go with the flow,” said John Silvia, chief economist at Wells Fargo.
In updated economic forecasts it issued Wednesday, the Fed predicted unemployment would fall a bit further during the next two years than it thought in September.