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Fed Surprises With Pullback of Sweeping Stimulus Program

Stocks in this article: SPY

NEW YORK (TheStreet) -- The Federal Reserve's policy-making arm elected to scale back its economic stimulus program by $10 billion a month to $75 billion a month.

The central bank chose to taper its purchases of mortgage-backed securities and longer-term Treasuries by $5 billion a piece to $35 billion and $40 billion, respectively.

The Fed's unprecedented so-called open-ended monetary stimulus program has helped boost the S&P 500 since initially being implemented in September 2012 and expanded a few months after that.

During the final press conference of his tenure as chairman of the Federal Reserve, Ben Bernanke said the bank would keep the federal funds rate near historic low levels well past the time the labor market hits the 6.5% unemployment rate threshold.

"If you look at [the Fed's] projections, we may hit that 6.5% target at the end of 2014, but not see a rise in the federal funds rate until a year later, at the end of 2015," Ben Garber, and economist at Moody's Analytics, said in an interview.

The decision to scale back quantitative easing came in Bernanke's penultimate meeting. The Fed chair famously moved the central bank into a highly accomodative position following the 2008 financial crisis and became best known for his multiple rounds of monetary stimulus, culminating in late 2012 with unprecedented open-ended -- without a stated conclusion -- purchases in mortgage-backed securities and then longer-term Treasuries.

Many economists expected the Fed to delay so-called tapering -- a UBS survey said just 33% of economists forecast such action -- but it appeared Bernanke and voting member of the Federal Open Market Committee determined there was enough strong economic data to change course.

During the press conference, Bernanke said current policy will continue without any change when Janet Yellen -- who is likely to receive approval by the U.S. Senate -- succeeds the Fed chief.

Stocks surged to all-time highs following the Fed statement and press conference in a sharp upward move that suggested investors were betting on the fundamentals of an improving economy.


-- Written by Joe Deaux in New York.

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