WASHINGTON (AP) - Chairman Ben Bernanke ended weeks of speculation Wednesday by saying the Federal Reserve will likely slow its bond-buying program later this year and end it next year if the economy continues to improve.
The Fed's bond purchases have helped keep long-term interest rates at record lows.
Bernanke said the reductions would occur in "measured steps" and that the purchases could end by the middle of next year. By then, he said he thought unemployment would be around 7 percent.
The chairman likened any reduction in the Fed's $85 billion-a month in bond purchases to a driver letting up on a gas pedal rather than applying the brakes. He stressed that even after the Fed ends its bond purchases, it will continue to maintain its vast investment portfolio, which will help keep long-term rates down.
The ultra-low borrowing rates the Fed has engineered have been credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth America lost to the recession. If a pullback in the Fed's bond purchases sends rates up, mortgages and other consumer and business loans would become more expensive.
The Fed sketched a brighter economic outlook Wednesday, which helps explain why it thinks record-low rates may soon no longer be necessary. Low rates help fuel economic growth. But they also raise the risk of high inflation and dangerous bubbles in assets like stocks or real estate.
Speaking of the economy, Bernanke said, "The fundamentals look a little better to us."
He spoke at a news conference after the Fed ended a two-day policy meeting. After the meeting, the Fed voted to continue the pace of its bond-buying program for now. But it offered a more optimistic outlook for the U.S. economy and job market.
In its statement, the Fed said the economy is growing moderately. And for the first time it said the "downside risks to the outlook" had diminished since fall.
Timothy Duy, a University of Oregon economist who tracks the Fed, called the statement "an open door for scaling back asset purchases as early as September."
The fact that the Fed foresees less downside risk to the job market "gives them a reason to pull back" on its bond purchases, Duy said.
Stocks slide as Fed says bond purchases could slow
Financial markets shuddered Wednesday after the Federal Reserve said it could start scaling back its huge economic stimulus program later this year and end it by the middle of 2014.
The reaction by investors - the Dow Jones industrial average fell more than 200 points and the yield on the 10-year Treasury note rose to its highest in 15 months - showed just how much investors have come to depend on the Fed's easy money policies that have helped send the stock market up 141 percent in the past four years.
The selloff was broad. All 10 sectors in the Standard's & Poor's 500 were down. The S&P 500 index fell 22.88 points, or 1.4 percent.
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