By Jonathan Spicer and Jason Lange
WASHINGTON, Dec 18 (Reuters) - The U.S. Federal Reserve announced plans to trim its aggressive bond-buying program on Wednesday but sought to temper the long-awaited move by suggesting its key interest rate would stay lower for even longer than previously promised.
In what amounts to the beginning of the end of its unprecedented support for the U.S. economy, the central bank said it would reduce its monthly asset purchases by $10 billion, bringing them down to $75 billion. It trimmed equally from mortgage and Treasury bonds.
'The (policy-setting) committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced,' the Fed said after a two-day meeting.
The move, which surprised some investors, was a nod to better prospects for the economy and labor market and marks a historic turning point for the largest monetary policy experiment ever.
Stocks initially dropped, but quickly moved back into positive territory. Similarly, bond prices slid but then bounced back. The dollar rose against the euro and the yen.
'They finally pulled a Band-aid off that they've been tugging at for a long time,' Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.
END TO AN ERA?
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.
The Fed said it 'modestly' reduced the pace of bond buying in light of better labor market conditions.
But in a move likely meant to forestall any sharp market reaction that could undercut the recovery, the central bank also said it 'likely will be appropriate' to keep overnight rates near zero 'well past the time' that the jobless rate falls below 6.5 percent.
It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5 percent. The rate stood at 7.0 percent in November, a five-year low.
The Fed's latest so-called quantitative easing program, or QE, was launched 15 months ago to kick-start hiring and growth in an economy that was recovering only slowly from the Great Recession. The Fed's first QE program was launched in the midst of the 2008 financial crisis.
'The committee will likely reduce the pace of asset purchases in further measured steps at future meetings,' the central bank said.
Fed Chairman Ben Bernanke, whose term expires at the end of January, will explain the Fed's thinking at a news conference at 2:30 p.m. (1930 GMT).
Meanwhile, the Fed lowered its expectations for both inflation and unemployment over the next few years, acknowledging the jobless rate has fallen faster than expected.
It expects it to reach a range of 6.3 percent to 6.6 percent by the end of 2014, from a previous prediction of 6.4 percent to 6.8 percent.
Three policymakers now expect the first rate rise to come in 2016, up from only two making that prediction in September, while a strong majority of 12 of the Fed's 17 top officials still see the move in 2015.
The Fed has kept rates near zero since the depths of the financial crisis in late 2008, and its asset purchases have stoked anxiety that they could unleash inflation or fuel hard-to-detect asset price bubbles. Even some within the Fed have worried the purchases could have unintended effects.
The unprecedented money-printing has helped drive U.S. stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets this year as investors anticipated an end to the easing.
Earlier on Wednesday, Brazil's finance minister issued a plea for the Fed to end its buying sooner rather than later to reduce market uncertainty that has kept emerging economies on edge.
But some have credited the Fed's asset purchases with stabilizing an economy and banking system that had been crippled by the 2008 financial crisis and with staving off what could have been a damaging cycle of deflation.
One policymaker, Eric Rosengren of the Boston Fed, dissented against the decision, which he felt was premature, according to the statement.
Recent growth in jobs, retail sales and housing, as well as a fresh budget deal in Congress, had convinced a growing number of economists the Fed would trim the bond purchases. The 15-month-old program is meant to put downward pressure on long-term borrowing costs to stimulate investment and hiring.
But many thought the central bank would wait until early in the new year, given persistently low inflation and the fact that the world's largest economy has stumbled several times in its crawl out of the 2007-2009 recession.
According to a Reuters poll taken before U.S. lawmakers struck a budget deal last week, only 12 of 60 economists expected the Fed to scale back its purchases this week. Twenty-two predicted a move in January, while about half pointed to March.
A handful of the Fed's policymakers had been pushing for the U.S. central bank to better telegraph how it plans to wind down the stimulus program, or to clarify its longer-term intentions to keep policy loose.
The Fed policy meeting was the penultimate one of Bernanke's tenure. His second four-year term as chairman of the central bank expires on Jan. 31, just two days after the close of the Fed's first policy meeting of 2014.
Janet Yellen, the Fed's vice chair and a strong proponent of the Fed's aggressive response to the recession, is positioned to succeed Bernanke. The U.S. Senate is expected to vote to confirm her for the post by the end of this week.
(Reporting by Jonathan Spicer and Jason Lange; Editing by Krista Hughes and Tim Ahmann) Keywords: USA FED/
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