The Federal Reserve has announced that it will begin to reduce the pace of its asset purchases, a policy known as quantitative easing, starting in January. This marks a significant step in the central bank’s efforts to unwind the extraordinary measures taken to support the economy during the financial crisis and subsequent recession.

Details of the Taper

The Fed will reduce its monthly purchases of mortgage-backed securities (MBS) by $5 billion and its purchases of Treasury bonds by $5 billion, for a total reduction of $10 billion per month. This will bring the total monthly purchases down to $75 billion.

The committee stated that it will likely continue to taper its asset purchases in measured steps at future meetings, provided that the economy continues to improve as expected. The pace of future reductions will depend on incoming data and the evolving economic outlook.

Economic Outlook

The Fed’s decision to taper reflects its assessment that the economy is strengthening. In its statement, the committee noted that the labor market has shown further improvement and that inflation has been running below the Fed’s 2 percent target.

The Fed also reiterated its commitment to keeping interest rates near zero for an extended period, even after the unemployment rate falls below 6.5 percent, especially if inflation continues to run below the Fed’s 2 percent target.

Market Reaction

The announcement was largely expected by the markets, and the initial reaction was relatively muted. However, the stock market rallied following the announcement, and bond yields rose slightly.

Analysts believe that the Fed’s decision to taper is a sign of confidence in the economy and that it is a necessary step to normalize monetary policy. However, they also caution that the Fed must carefully manage the tapering process to avoid disrupting the markets and derailing the economic recovery.