US begins ‘tapering’ of economic stimulus

Stockmarkets around the world are on the rise following the US Federal Reserve’s decision to begin scaling back its economic stimulus.

The Fed last night announced that it would reduce its monthly bond-buying programme - designed to pump liquidity into the financial system - by $10bn (£6.1bn).

This means from January the Fed’s stimulus will amount to $75bn a month rather than the $85bn it has been injecting into the system since September 2012.

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Fed chairman Ben Bernanke indicated that a further $10bn will be cut from the package at each meeting next year, meaning the programme of quantitative easing will be over by late 2014.

He also gave a strong indication that interest rates in the US were likely to remain at a record low 0.25 per cent for more than a year regardless of the country’s employment position, in a bid to reduce speculation in the bond markets as to when interest rates will finally rise.

Economists had been split on the likelihood of ‘tapering’ beginning this month as Fed chairman Ben Bernanke was preparing to hand over leadership of the US central bank to Janet Yellen. But nine out of 10 members of the Federal Open Market Committee (FOMC) agreed to begin reducing the rate at which it buys up bonds and mortgage-backed securities every month.

The leading US stockmarket, the S&P 500, closed at a fresh record high of 1,810.65, a gain of 1.7 per cent. Japan’s Nikkei index was also up 1.7 per cent overnight.

In early trading in the UK and Europe stocks have also risen, with the FTSE 100 index gaining 1 per cent and the EuroStoxx 50 index up 1.7 per cent.

Meanwhile US 10-year government bond yields - which move inversely to prices - rose slightly from 2.84 per cent to 2.89 per cent.

In a statement the Federal Reserve said ultra-low interest rates “will be appropriate at least as long as the unemployment rate remains above 6.5 per cent”, but also linked in its inflation target of 2 per cent and longer-term inflation expectations.

“In determining how long to maintain a highly accommodative stance of monetary policy, the [FOMC] will also consider other information, including additional measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” the statement said.

“The committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 per cent.”