WASHINGTON — Given the U.S. economy's growing strength, the Federal Reserve pushed ahead Wednesday with a plan to shrink its bond-buying program, even though the prospect of reduced stimulus and higher interest rates has rattled global markets.
The central bank said it will cut its monthly bond purchases starting in February by $10 billion to $65 billion. It also reaffirmed a plan to keep short-term rates at record lows to try to reassure investors that it will keep supporting an economy that's stronger than at any point since the recession, yet remains less than fully healthy.
The Fed's decision came in a statement after the final policy meeting of Ben Bernanke, who will step down Friday after eight years as chairman. He will be succeeded by Vice Chair Janet Yellen.
Most economists expect that under Yellen, the Fed will announce a string of $10 billion monthly reductions in bond purchases at each meeting this year, concluding with a final $15 billion cut in December. Still, if the American economy were to falter, the Fed has stressed that it might suspend its pullback in bond buying so it could keep aggressively holding down long-term loan rates.
Many global investors fear that reduced Fed bond buying will raise U.S. interest rates and cause investors to move money out of emerging markets and into the United States for higher returns. Currency values in emerging economies have fallen over that concern.
In response, central banks in emerging economies, from India to Turkey to South Africa, have been acting to counter any damage from the Fed's pullback and the prospect of higher U.S. rates. They've been raising their own rates, hoping to control inflation, boost their flagging currencies and keep investors from fleeing.
But so far, those currencies have continued to weaken.
The Fed's bond purchases have been intended to keep long-term borrowing rates low to spur spending and growth. Inflation in the U.S. remains historically low. Consumer prices rose just 1.5 percent in 2013, below the Fed's target of 2 percent.
The Fed's bond purchases have helped fuel a huge stock market rally over the past year as investors shifted money out of low-yielding bonds and into stocks. Now that the Fed is cutting back on bond purchases, many investors fear stocks will fall.