Fed to slow buying to $75bn from January The US Federal Reserve took its first step away from a historic era of monetary stimulus by deciding to taper its monthly asset buying from $85bn to $75bn. The decision marks the moment when the Fed's unprecedented bond-buying finally passed its peak almost five years after a financial crisis that shook the foundations of the global economy. Starting in January, the Fed will pare back its Treasury purchases by $5bn to $40bn a month, and its mortgage-backed securities purchases by $5bn to $35bn a month. The Fed also reinforced its forward guidance of low interest rates with a statement that interest rates are likely to stay close to zero "well past the time that the unemployment rate declines below 6.5 per cent." A majority of 9-1 voted for the decision. Eric Rosengren, president of the Boston Fed, dissented saying that the taper was premature until the data showed that stronger growth will be sustained. "The Committee sees the improvement in economic activity and labour market conditions . . . as consistent with growing underlying strength in the broader economy," says the Fed statement. If the data stays strong it will "likely reduce the pace of asset purchases in further measured steps at future meetings." US equities rallied, reversing earlier losses and Treasury yields came under further pressure after the FOMC announced it would taper bond purchases by $10bn a month at the start of next year. The S&P 500 rebounded from modest losses and rose as much as 1.2 per cent as investors focused on guidance from the central bank that low policy rates will remain in place for a considerable period of time after asset purchases end and the economy strengthens. The 10-year Treasury yield initially rose to 2.92 per cent, and in the hour after the news and the benchmark yield retreated to 2.87 per cent, or up four basis points on the day. The dollar rose and then fell on a trade-weighted basis, while gold trimmed early gains. "The Fed's statement is the most optimistic in quite some time," said Marc Chandler, strategist at Brown Brothers Harriman. The statement also underscores that the Fed will have a highly accommodative stance for a considerable time even after the purchase program ends and well past the time that unemployment falls below the 6.5 per cent threshold. The Federal Reserve's decision to taper marks a turning point for global financial markets that have been driven by the QE3 programme for more than a year. With an end to ever-easier US policy, the dollar will become a more attractive currency to hold, and the taper could lead to a new period of turmoil in emerging markets. "Overall, the surprise decision to taper in December appears to be justified on the Fed more optimistic growth and labour market outlook," said Millan Mulraine, strategist at TD Securities. However, with inflation remaining a concern we expect the Fed to remain cautious. Tapering means that Ben Bernanke, Fed chairman, has ended a tenure marked by aggressive stimulus and almost constant economic firefighting with the first step away from easy monetary policy. He hosted his last press briefing on Tuesday afternoon as he prepares to step down after eight years in the top job. His final FOMC meeting as chairman will be in January before Janet Yellen, presently the vice-chair, takes over on February 1. Only time will tell if the $10bn taper was the right decision. I am afraid that taking the punch bowl away before the party has a buzz will prove to be a mistake Steven Ricchiuto, chief economist Mizuho Securities The taper comes 15 months after the Fed began its unprecedented third round of asset purchases in September 2012. Unlike previous programmes, there was no limit on its size, with the Fed pledging to buy until it achieved a "substantial improvement" in the outlook for the labour market. Since then it has bought more than $1tn in Treasuries and MBS. Even with a taper, its total balance sheet will soon exceed $4tn. The goal of the purchases is to drive down long-term interest rates and stimulate the economy now that short-term rates are already stuck at zero. The Fed regards QE3 as booster to increase the economy's momentum and always intended to slow and stop the purchases once that was achieved. Recent news suggests the outlook for the labour market is much stronger than it was 15 months ago, with many forecasters now expecting economic growth of close to 3 per cent in 2014. Non-farm payrolls - the single most important indicator for the Fed - are up by an average of 193,000 in the last three months. Added to strong data on retail sales, rising optimism in manufacturing and a budget deal that settles fiscal policy for the next couple of years the improving outlook has given the Fed enough confidence to taper. However, inflation has been weak, with the Fed's preferred index rising by just 0.7 per cent on a year ago. That highlights the continued slack in the economy that will motivate a long period of zero interest rates. "Only time will tell if the $10bn taper was the right decision," says Steven Ricchiuto, chief economist at Mizuho Securities. My view remains that in a credit cycle it is the FOMC's responsibility to remain accommodative until the economy has achieved a self-sustaining growth trajectory. I am afraid that taking the punch bowl away before the party has a buzz will prove to be a mistake.