The U.S. Federal Reserve formally announced on Dec. 18 its decision to begin tapering its economic stimulus program in January 2014.
The move to reduce the bond-buying program from $85 billion per month - the level of quantitative easing that had been in effect since September 2012 - to $75 billion per month was one that had been long anticipated and around which there was much speculation. A promising November jobs report, released earlier in December, only added to swirling rumors that the December Federal Open Market Committee meetings would finally trigger changes originally slated to begin back in September.
In a public statement, the central bank announced it would scale back bond purchases of both types - securities and Treasuries - by $5 billion per month each. According to CNNMoney, the bond-buying program has grown so large that Fed assets were expected to reach $4 trillion by the week ending Dec. 22.
"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," read the statement.
Where will rates go?
Despite the long-awaited start to tapering, Fed officials have stressed their commitment to keeping short-term mortgage interest rates low, until either the employment rate falls below 6.5 percent or the inflation rate rises above 2.5 percent. Rates that had been held down to artificially low levels for months thanks to the purchase program had already begun to creep up beyond 4.5 percent based on speculation that tapering would begin sometime in 2014.
Two consecutive positive employment summaries - the one from November and especially surprising October returns in light of that month's government shutdown - only further fueled theories that tapering might be imminent. Still, Fed Chairman Ben Bernanke stressed that the committee would enhance its guidance going forward in an effort to hold rates down, and the complete end to stimulus spending is likely still years away.
"The committee is determined to avoid inflation that is too low, as well as inflation that is too high," Bernanke said at the ensuing press conference.
CNN reported that rates are expected to remain steady at least through the end of the year, allowing consumers to capitalize on favorable terms for mortgage, auto and business loans - albeit not at the historically low levels seen earlier in 2013.
"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," read the statement. "Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month."
An uneasy history of easing
Quantitative easing has been, in many ways, an unprecedented measure taken by the Federal Reserve to stimulate the economy. Lowering interest rates by way of stimulus spending is not necessarily a revolutionary concept, but the magnitude and duration of this particular program have been unlike anything employed before.
The Fed first began slashing key interest rates in 2008, and eventually started buying Treasury and security bonds in an effort to reduce long-term interest rates as well. Quantitative easing has taken on three separate forms - nicknamed Q1, Q2 and Q3 - with the third phase the only portion of the program never assigned a specific end date.
Tapering, however, was expected to begin in mid-September 2013, a deadline that came and went as the Fed backpedaled without ample evidence of improvement to unemployment levels. Bernanke said in May that a reduction would occur later in 2013 and that bond buying could cease entirely in 2014, but when the rate of joblessness failed to fall below 7 percent, central bank officials began offering intentionally vague timetables. Tapering plans were deemed "necessarily uncertain," and even heading into the mid-December FOMC meetings it was anyone's guess how soon - and to what degree - tapering would occur.
Reportedly just one Fed member - Eric Rosengren of the Boston Federal Reserve - dissented formally against the decision on the contention that unemployment levels remained too high and inflation rates were still too low. Indeed, if interest rates begin to climb based on the reduction, it could prove detrimental to the recovering housing market, where inventory levels remain low, property values in many areas are high and consumer confidence is still relatively tepid.
Bernanke has one more policy meeting to attend after the new year before relinquishing his post as chairman on Jan. 31. Janet Yellen, nominated as Bernanke's successor in October, will then be charged with the task of navigating the rest of the exit strategy.