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BUSINESS
Janet Yellen

Fed continues to taper economic stimulus

Paul Davidson
USA TODAY
Outgoing Federal Reserve Chairman Ben Bernanke.

The Federal Reserve proved Wednesday that it will take more than a weak jobs report or global financial jitters to derail its plans to wean the economy off the central bank's extraordinary stimulus.

Despite a slowdown in job growth last month and recent financial turmoil in emerging markets, the Fed said it will pare its bond-buying program by $10 billion for the second straight month.

In a statement after a two-day meeting, Fed policymakers said the central bank will buy $65 billion a month in Treasury bonds and mortgage-backed securities, down from $75 billion. In December, Fed policymakers took their first step in tapering the program begun in September 2012, reducing the bond-buying from $85 billion a month.

The purchases are intended to hold down long-term interest rates and spur the economy and labor market.

The Fed noted that since its last meeting, "labor market indicators were mixed," and the housing recovery "slowed somewhat." But it added that household spending and business investment "advanced more quickly in recent months."

Fed Chairman Ben Bernanke told reporters last month that the Fed would continue to trim the purchases generally in $10 billion increments, assuming economic reports meet Fed projections. He said the bond-buying likely would be halted by the end of the year.

In a research note, economist Paul Edelstein of IHS Global Insight said: "We believe that the bar is set fairly high to stop, pause or reverse the tapering process. In particular, we would probably need to see several months of sub-100,000 payroll growth" and a drop in already-low inflation.

Employers added only 74,000 jobs last month, down sharply from a 200,000-plus monthly pace since last August. But economists noted that much of the decline was due to severe weather that kept workers at home.

The unemployment rate last month fell to 6.7% from 7%, edging closer to the 6.5% the Fed has identified as a threshold for when it could begin to consider raising its benchmark short-term interest rate. That rate has been near zero since the 2008 financial crisis.

But the Fed reiterated Wednesday that it will likely keep the short-term rate near zero "well past" the time that unemployment falls below 6.5%.

Also prompting speculation that the Fed would put off further tapering this month were falling bond prices in emerging markets such as Turkey and Greece as growth slows in China. The Fed's tapering plan itself is expected to push up U.S. interest rates, making foreign investments less attractive.

But the economy generally has accelerated recently, with growth in the second half of 2013 estimated to exceed an annual rate of 3%.

The meeting was the last for Bernanke, whose second four-year term ends Jan. 31. Bernanke is credited with helping lead the nation from the financial crisis and recession with a series of bold moves to pump cash into the economy. Fed Vice Chair Janet Yellen will succeed him, becoming the first woman to head a major central bank.

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