Fed ends bond buying but keeps low-rate pledge

Despite stock market volatility and global economic troubles, the Federal Reserve on Wednesday agreed to end bond purchases that have supported U.S. economic growth since the 2008 financial crisis, marking a milestone in the five-year-old recovery.

At the same time, the Fed pledged to keep its benchmark short-term interest rate near zero for a "considerable time" after the bond buying ends. The Fed did upgrade its view of the labor market but gave no clear signal that it planned to raise its benchmark rate earlier than the mid-2015 time frame previously indicated by Fed policymakers despite the solidly performing U.S. economy.

As widely anticipated, the Fed said it would reduce its monthly purchases of Treasury bonds and mortgage-backed securities from $15 billion to zero, ending its third round of bond buying since the crisis after less than two years. It began tapering those purchases from $85 billion a month in December as the economy and job growth strengthened.

Stocks initially fell after the Fed's announcement at 2 p.m. ET.

Although the Fed has said for months that it planned to halt the $1.6 trillion round of bond-buying in October, the move was thrown into doubt by reports two weeks ago of weak euro zone growth and disappointing U.S. retail sales that sent stock and bond markets reeling.

At the time, St. Louis Fed President James Bullard, who is not a member of the Fed's policymaking committee, said policymakers should consider delaying the expected phase-out of the bond purchases, which have held down long-term interest rates in an effort to spur economic activity.

Since then, however, U.S. economic news has been generally encouraging, with factory output and consumer confidence surging, and at least partly recovering.

In a statement after a two-day meeting, the Fed said the labor market improved "somewhat further, with solid job gains and a lower unemployment rate." It also said that "underutilization of labor resources is gradually diminishing."

The comments represent a more positive view of the job market than the September statement, which said "the unemployment rate is little changed" and "there remains significant underutilization of labor resources."

Fed Chair Janet Yellen has pointed to the large number of Americans working part-time who prefer full-time jobs and still high long-term unemployment as indicators of ongoing weakness in the labor market.

The Fed, however, reiterated Wednesday that it plans to keep its benchmark federal funds rate near zero "for a considerable time" after the end of the bond buying. It noted that near-term inflation will likely continue to be tempered by falling energy prices, though the longer-term outlook remains stable.

Some Fed policymakers have called for the removal of the pledge, noting that the economy has picked up this year. The economy grew 4.6% at an annual rate in the second quarter and monthly job growth has averaged 227,000 this year, up from 194,000 in 2013.

Several analysts, though, predicted the Fed would not do away with the market-friendly assurance in light of the recent stock volatility. UBS economist Drew Matus said a change is more likely at a December meeting, when Fed Chair Janet Yellen can explain its implications at a scheduled news conference.

The unprecedented bond-program was an economic crutch that Fed policymakers determined finally could be tossed away. Since the 2008 financial crisis, the Fed has purchased about $3.9 trillion in Treasuries, mortgage-backed securities and other mortgage related debt in three separate rounds. Economists credit the program with helping stimulate more mortgage lending and other loans and nudging investments from low yielding fixed assets to stocks, driving up stock markets and making consumers feel wealthier.

But while the first $1.75 trillion round of bond purchases in 2008-09 is largely viewed as stabilizing a teetering financial system, many economists have said the programs since have yielded diminishing returns. Interest rates already were at historically low levels, while the massive amount of cash the Fed has injected into the banking system raises the risk of eventual high inflation.

Although the conclusion of the purchases spells the end of a historic infusion of easy money into financial markets, Fed policymakers have said it's unlikely to sell most of the securities and will instead allow them to gradually come off the Fed's books as they mature through the remainder of this decade. As a result, the banking system is likely to be flush with the Fed's cash at least for several years.