Stronger economic recovery triggers Fed QE3 tapering

The U.S. Federal Reserve on Wednesday announced it would reduce the pace of its monthly massive bond purchases, the third round of quantitative easing program, by 10 billion U.S. dollars each month starting January on the back of a stronger economic recovery.

In what amounts to the beginning of the end of its bond-buying program, the central bank will cut back on its monthly asset purchases from 85 billion dollars to 75 billion dollars, with 10 billion dollars trimmed equally from mortgage-back securities (MBS) and Treasury bonds, the Fed said after a two-day policy meeting of its Federal Open Market Committee (FOMC). the Fed's powerful policy setting panel.

The Fed is now purchasing MBS at a pace of 40 billion dollars per month and longer-term Treasury securities at a pace of 45 billion dollars per month, commonly known as QE3.

The policy shift comes after the U.S. economic activity is expanding at a "moderate" pace, and labor market has shown steady improvement, the Fed said in a statement.

"Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing," said the Fed.

"Today's policy actions reflect the Committee's assessment that the economy is continuing to make progress, but that it also has much farther to travel before conditions can be judged normal," U.S. Fed Chairman Ben Bernanke said Wednesday at a press conference after the meeting.

"Notably, despite significant fiscal headwinds, the economy has been expanding at a moderate pace, and we expect that growth will pick up somewhat in coming quarters, helped by highly accommodative monetary policy and waning fiscal drag," said Bernanke, who is set to step down on Jan. 31.

The FOMC expects that with appropriate policy accommodation, U.S. economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the FOMC judges consistent with its dual mandate of price stability and full employment, said the statement.

"To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," it added.

The Fed on Wednesday also decided to keep the target range for the federal funds rate at zero to 0.25 percent. Since the onset of the financial crisis, the Fed has kept its short-term interest rate at the historically low levels and completed two rounds of quantitative easing programs, known as QE1 and QE2.

"The current near-zero range for the federal funds rate target likely will remain appropriate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal," said Bernanke.

The U.S. unemployment rate in November declined to 7 percent, the lowest level in five years with job creation growing at a steady pace, showing that the U.S. economic recovery was gaining momentum.

U.S. stocks surged on Wednesday after the Fed announced a modest reduction in its monetary stimulus program but reaffirmed its commitment to continuing monetary easing and zero interest rate policies.