The US Federal Reserve plans to begin tapering its monetary policy of quantitative easing in January, announcing on Wednesday that it would pare purchases of Government-backed bonds by $10 billion to $75 billion dollars a month.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the (monetary policy) committee decided to modestly reduce the pace of its asset purchases,” the central bank said in a statement.

If the job market continues to gradually improve and currently muted inflation does not slip toward deflation, the Fed will “likely reduce the pace of asset purchases in further measured steps at future meetings,” but bond buying is “not on a preset course.”

The Fed expects to maintain current interest rates — set near zero since December 2008 — at least until unemployment falls below 6.5 per cent, as long as inflation does not exceed 2.5 per cent and longer-term inflation expectations are “well anchored.”

US inflation for the 12 months through November was 1.2 per cent, well below the Fed’s 2 per cent target. Unemployment fell last month to a five-year low of 7 per cent.

After a two-month stock market sell-off that followed the Fed’s first suggestion in May of a looming taper, Wall Street rallied to record highs on Wednesday in the heaviest trading session since September.

The blue-chip Dow Jones Industrial Average leapt 1.8 per cent to close at 16,167.97, and the broader Standard & Poor’s 500 Index surged 1.7 per cent to 1,810.65.

Congress’ two-year budget agreement is better for the US economy than the 16-day Government shutdown in October, Federal Reserve Chairman Ben Bernanke said.

“Relative to where we were in September and October, it certainly is nice that there’s a bipartisan deal,” he told reporters after the central bank’s last regular meeting of the year.

The Fed’s monetary policy statement did not mention the budget deal, which passed the Senate minutes after Bernanke spoke and was headed to President Barack Obama to be signed into law. The central bank did note that the drag on the economy from cuts that took effect in March “may be diminishing.” In addition to easing some of those budget cuts, the budget compromise “will be good for confidence” by removing fiscal uncertainty, Bernanke said.

He emphasized that larger, long-term deficit reductions are still needed, but that the budget deal was a promising sign, “Even if the outcomes are small, it’s a good thing that (congressional leaders) are working cooperatively and making some progress.” Bernanke, who steps down as Fed chief on January 31, said that his departure and expected handover to deputy Janet Yellen, who could receive Senate confirmation this week, was not a factor in the timing of the monetary policy pivot.

Yellen voted for Wednesday’s policy statement, including the taper.

“I have always consulted closely with Janet, even well before she was named by the President (to become chairwoman), and I consulted closely with her on these decisions as well, and she fully supports what we did today,” Bernanke said.

Wednesday’s press conference was the last for Bernanke. Regularly taking questions from the press was an innovation during his tenure in an attempt to help markets understand Fed decision-making and better communicate monetary policy expectations.

Bernanke’s final meeting of the Fed’s monetary policy committee is set for January 28-29, but no press conference is scheduled.

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