After months of investors intensely speculating and parsing Federal Reserve Chairman Ben Bernanke's words, the central bank has finally decided to taper.
The central bank announced Wednesday it would dial back its $85 billion monthly asset purchase program to $75 billion, starting in January. Monthly asset purchases will now include $35 billion in mortgage-backed securities and $40 billion in longer-term Treasurys, a $5 billion reduction in each.
The news comes at the end of a two-day meeting of the Federal Open Market Committee, the arm of the bank that sets interest rates and determines other market operations. Fed watchers have been scrutinizing economic data since the Fed's last meeting in October, when the committee said it wanted to await more evidence of a sustained recovery before dialing back its purchases.
In its December meeting, the Fed said it has now seen sufficient progress to warrant tapering its asset purchases.
Even when taking fiscal drag into account, "the committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy," the FOMC said in a statement. "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases."
The committee also announced that it would likely see fit to maintain a near-zero federal funds rate "well past the time that the unemployment rate declines below 6-1/2 percent." This is more specificity than the committee had previously provided. In its October statement, the FOMC had said it anticipated it would keep low rates in place "at least as long as" the jobless rate was above 6.5 percent and inflation was below 2.5 percent.
The committee noted that while the unemployment rate remains "elevated," the labor market continues to improve and household spending continues to increase. However, members also said the housing recovery has slowed and fiscal policy continues to be a drag on the economy.
Of the 10 voting members, only one dissented, Boston Federal Reserve Bank President Eric Rosengren, who said he felt tapering was premature.
The decision to taper comes in the wake of several positive economic reports. Three of the last four jobs reports came in with payroll figures showing over 200,000 jobs added, and the latest GDP report showed economic output grew by an unexpectedly strong 3.6 percent annualized growth in the third quarter.
Though the Fed is choosing to taper, Bernanke stressed at a Wednesday press conference that the stimulus is continuing, despite the reduction in asset purchases.
"It's important to note, though, that even after this reduction, we will still be expanding our holdings of longer-term securities at a rapid pace," he said.
Three rounds of asset purchases have helped to balloon the central bank's balance sheet to a size of over $4 trillion. It will likely fall to incoming chair Janet Yellen, who is slated to become the chairwoman of the Federal Reserve after Bernanke's final FOMC meeting in January. Yellen's confirmation vote is expected to come before Senators leave town for Christmas. Currently, Yellen serves as vice chairman of the Fed, a position she has held since 2010.
Stocks jumped on the news, with the Dow Jones Industrial Average soaring by around 150 points shortly after the announcement. Investors' approval of the Fed's announcement may stem from the committee's new guidance on interest rates.