Dec 18 (Reuters) - The Federal Reserve started its long-awaited reduction in stimulus, cutting its monthly purchases to $75 billion a month, saying it expects to keep cutting asset buys 'in measured steps' if economic figures continue to improve.
After an initial decline, equity markets rebounded, suggesting investors view the Fed's action as confirmation of improving economic fundamentals.
KEY POINTS: * The Fed sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised. * The Fed trimmed equally from mortgage and Treasury bonds, reducing to $35 billion in mortgage securities and $40 billion in Treasury bonds. * The Fed's asset purchase program, a centerpiece of its crisis-era policy, has left it holding roughly $4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.
COMMENTS: MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BNY MELLON, NEW YORK:
'This was a surprise to me and I think to the market. We've had some understandable volatility in the currency market. Bond yields rose but it doesn't appear we'll hit 3 percent in the 10 year today. It seems clear that (Fed Chairman Ben) Bernanke, on his way out, wanted to set the machinery in motion and break down any resistance to getting started.
'It's certainly supportive for the dollar, though we are a little concerned about how the stock market is going to take this. As for the Fed, the September disappointment and the December surprise have really called into question the efficacy of the Fed's transparency.'
WAYNE KAUFMAN, CHIEF MARKET ANALYST AT ROCKWELL SECURITIES IN NEW YORK:
'Cutting the amount by $10 billion is a good signal that QE won't be a forever thing. I think people were prepared for this, and I think they are relieved that the Fed is starting. No one wanted this 800-pound gorilla in the market; I wanted them to start tapering in September. I'm not surprised to see markets rebound, since we've already seen a lot of weakness recently. Before today, we only had two positive sessions this month.'
STOCKS: U.S. stock indexes initially fell before rebounding, and turning substantially higher BONDS: U.S. bond prices initially added to losses, then reversed to nearly unchanged FOREX: The dollar rose against the euro before reversing, with the euro now highger
(Americas Economics and Markets Desk; +1-646 223-6300)
Keywords: USA ECONOMY/INSTANT
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