US Fed tapers starts, Ben Bernanke to slash bond purchases by $10 bn, emerging markets on notice

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US Federal Reserve Chairman Ben Bernanke smiles as he is asked a question during a news conference at the Federal Reserve in Washington. (AP) US Federal Reserve Chairman Ben Bernanke smiles as he is asked a question during a news conference at the Federal Reserve in Washington. (AP)
SummaryUS Fed actions expected to hit the emerging stock markets hard.

as investors anticipated an end to the easing.

"They finally pulled a Band-Aid off that they've been tugging at for a long time," said Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.

The Fed launched its third and latest round of quantitative easing, or QE, 15 months ago to kick-start hiring and growth in an economy recovering only slowly from the recession. Its first program was launched during the 2008 financial crisis.

The central bank's asset purchase programs, a centerpiece of its crisis-era policy, have left it holding roughly $4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.

To soothe investors' nerves, the Fed said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the jobless rate falls below 6.5 percent, especially if inflation expectations remain below target.

The Fed has held rates near zero since late 2008.

It was a noteworthy tweak to an earlier pledge to keep benchmark credit costs steady at least until the jobless rate, which dropped to a five-year low of 7.0 percent in November, hits 6.5 percent.

"The actions today are intended to keep the level of accommodation the same overall," said Bernanke, who held out the prospect of fresh stimulus if the economy stumbled. He said officials could further bolster their low-rate pledge, or even cut the interest rate they pay banks on excess reserves held at the Fed in a bid to spur lending.

EXPECTATIONS ON INFLATION, RATES

In fresh quarterly forecasts, the central bank lowered its expectations for both inflation and unemployment over the next few years, acknowledging the jobless rate had fallen more quickly than expected. It now sees it reaching a range of 6.3 percent to 6.6 percent by the end of 2014, from a previous prediction of 6.4 percent to 6.8 percent.

Three policymakers expect the first rate rise to come in 2016, up from only two in September, while 12 of the Fed's 17 top officials still see the move in 2015. Futures markets do not see better-than-even odds of a rate hike until September 2015.

Critics of the bond buying, including some Fed officials, have worried the program could unleash inflation or fuel hard-to-detect asset price bubbles.

But some have credited the purchases with stabilizing an economy and banking system that had

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