Bernanke: Economy strong enough to weather stimulus rollback

The Federal Reserve announced Wednesday it would begin rolling back its stimulus for the economy, cutting the amount of bonds it purchases every month by $10 billion.

Fed Chairman Ben Bernanke, in what could be his final press conference as the institution’s leader, said the Fed was ready to cut back its economic support because recent data suggested the recovery was well underway and unemployment was being trimmed.

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“We expect economic growth to be strong enough to support further job gains,” he said.

He added that if the economy continues to improve as expected, the Fed would likely continue to lower the size of its purchases at each policy meeting, with the goal of halting those buys altogether toward the end of 2014.

The central bank had been buying $85 billion in bonds every month. But beginning in January, it will buy $35 billion in mortgage bonds and $40 billion in Treasury debt — $5 billion less of each type.

However, Bernanke emphasized that Fed officials will still be keeping a close eye on economic data in the coming months, and will adjust its wind-down accordingly.

“Asset purchases are not on a preset course,” he said, calling the slowdown “deliberate and data-dependent.”

Furthermore, Bernanke said his apparent successor, Fed Vice Chairwoman Janet Yellen, is completely on board with the approach. Yellen is expected to be confirmed by the Senate this week.

“I have always consulted closely with Janet,” he said. “She fully supports what we did today.”

The decision to begin to taper the purchases comes as Bernanke enters his final month as chairman -- and draws to a close an historic period of the Fed. Since taking over the central bank in 2006, Bernanke has had to steer it through a financial crisis, and then push the Fed into uncharted territory with novel efforts to prop up an ailing economy.

In that effort, the Fed has garnered its share of critics, including a slew of congressional Republicans. Rep. Kevin Brady (Texas), who heads the Joint Economic Committee, was concise in his reaction to the Fed’s decision to slow its stimulus.

“It’s about time,” he said in a statement.

Under Bernanke’s watch, the Fed embarked on three different rounds of “quantitative easing,” the massive bond purchases that are aimed at further lower borrowing costs and spurring the economy. The Fed took that approach after it exhausted its traditional policy tool, lowering interest rates to zero in the aftermath of the financial meltdown.

While the Fed was slowing its purchases, Bernanke attempted to underline the significant support the Fed will still be providing to the economy.

“We’re not doing less,” he said. “We’re providing a great deal of accommodation.”

In the immediate aftermath, traders took Bernanke’s assurances in stride. Stocks surged after the announcement, as the Dow Jones Industrial Average ended the day up nearly 300 points.

While the Fed has come under fire for its efforts to fight the recession, Bernanke struck an optimistic note on his tenure leading the central bank. He said he believed the Fed’s efforts helped create jobs, and also helped offset the fiscal drag and drama that has emanated from Washington in the last several years.

The decision to begin tapering the stimulus came after a solid run of positive economic data.

The economy added more jobs and the unemployment rate fell to 7 percent in November, further than expected and to a lower rate than before President Obama’s election.

That report came on the heels of a similarly strong October report, and findings that the economy grew by 3.6 percent in the third quarter of the year, higher than originally estimated.

The run of strong data appears to have convinced the Fed the economic recovery was stable enough that it could begin to remove its support, as the institution faced growing concern about the implications of its now $4 trillion balance sheet.

New economic projections the Fed released along with its policy update revealed bank officials have grown more confident about the economy in the near future. Expectations for economic growth and unemployment both ticked up slightly, while inflation expectations remained in line with the Fed’s goals.

The Fed had been undergoing its third round of “quantitative easing” since September 2012. Under the latest version of the stimulus program, the central bank was buying up $85 billion of bonds each month, in an effort to further lower borrowing rates and spur on the economy.

Fed watchers had been primed for a slowdown after Bernanke laid out the institution’s exit strategy for that program during a July press conference.

If the economy proceeded as expected, he said the central bank would slow its purchases and ultimately bring them to a halt sometime in mid-2014.