20 10 2014

Federal Reserve stays on cruise control

The U.S. economy is strengthening but the Federal Reserve remains in cruise control. The Fed decided to once again reduce its monthly bond purchases by $10 billion, as expected.

The central bank has been gradually reducing, or tapering, its monthly bond purchases since January. It will now buy just $25 billion a month. That's down from a peak of $85 billion when the Fed started its third round of quantitative easing, a policy dubbed QE3 on Wall Street. At this rate, the Fed will stop purchasing bonds this fall.

Stocks rose immediately following the news but pulled back towards the end of the day. The 10-year Treasury yield ticked slightly higher.

The next task ahead -- deciding when to raise interest rates -- still seems a long way off, and the Fed didn't give many hints. Instead, its top policymakers issued a statement that acknowledged inflation is nearing its sweet spot, but also cited ongoing weakness in the job market.

Aside from those minor changes, the statement was nearly identical to other statements the Fed issued over the last few months.

In addition to its bond purchases, the Fed has kept its short-term interest rate, the federal funds rate, near zero since 2008 in an effort to stimulate economic growth. When that rate is low, it translates into low rates for mortgages and other loans, thereby making it cheaper for consumers and business owners to borrow money.