Fed to slow pace of monthly bond purchases by another $10B despite turmoil in emerging markets

WASHINGTON – The Federal Reserve says it will cut its monthly bond purchases by an additional $10 billion to $65 billion because of a strengthening U.S. economy. It’s doing so even though the prospect of reduced Fed stimulus and higher U.S. interest rates has rattled global markets.

The Fed also reaffirmed its plan to keep short-term rates at record lows in a statement it issued Wednesday after Ben Bernanke’s final policy meeting. Bernanke will step down Friday after eight years as chairman.

Many global investors fear that reduced Fed bond buying will boost U.S. rates and cause investors to move money out of emerging markets and into the United States for higher returns. Currency values in emerging nations have fallen. India, Turkey and South Africa have raised rates to try to protect their currencies.

Most economists expect a string of $10 billion monthly reductions in bond purchases to be announced at each Fed meeting this year, concluding with a final $15 billion cut in December.

Janet Yellen, who will succeed Bernanke on Monday, took part in this week’s Fed meeting in her role as vice chair. Yellen has been closely aligned with Bernanke’s policies.

The action Wednesday was approved on a 10-0 vote.

The Fed’s statement repeated a phrase it first used in December: That it would hold its benchmark short-term rate near zero “well past” the time unemployment falls below 6.5 per cent. It is part of the Fed’s effort to reassure investors that it will keep supporting an economy that remains less than fully healthy.

The unemployment rate dipped from 7 per cent to 6.7 per cent in December, the lowest point in five years. Still, much of the decline was due to an exodus of job seekers who gave up looking for work and were no longer counted as unemployed.