The US Federal Reserve on Wednesday sketched a brighter picture for the country's economy when Chairman Ben Bernanke sent out his most explicit message that the Fed was likely to begin reducing the pace of quantitative easing later this year, before bringing it to an end by the middle of next year.

Stick to stimulus for now

In a statement following its two-day policy meeting, the Fed described the economic growth as "moderate" while for the first time said the downside risks to the outlook for US economy and the labor market have diminished since last fall.

Despite the improvements, the unemployment rate is still too high and the Fed will keep buying bonds "until the outlook for the labor market has improved substantially," the statement said.

It also pledged to keep the short-term interest rates at near-zero level as long as the unemployment rate remains above 6.5 percent and inflation is projected to stay below 2.5 percent.

The central bank is buying 85 billion dollars a month in mortgage-backed securities and Treasury bonds, in addition to holding the rates at record low. Both measures are intended to ease financial conditions and promote growth and job creation.

Since the onset of the financial crisis, the Fed has completed two rounds of quantitative easing programs. It announced a third round of quantitative easing last September with purchases of 40 billion dollars mortgage-backed securities per month. It expanded the bond-buying program with additional monthly buying of 45 billion dollars treasury bonds in December 2012. The Fed's balance sheet has ballooned to about 3.4 trillion dollars so far.

Improved outlook

In its updated economic forecast also released at the close of the meeting, the Fed struck a slightly more optimistic tone on the economic outlook, especially for the next year.

The forecast, which is based on the individual projections of the 19 officials of Fed's policy-setting panel, envisioned the unemployment rate between 7.2 percent to 7.3 percent in 2013, and between 6.5 percent to 6.8 percent in 2014, lower than previously predicted.

It expected the US economy to grow at a pace of 2.3 percent to 2.6 percent in 2013, and the growth would pick up next year to between 3 percent and 3.5 percent, up from their previous projection of 2.9 percent to 3.4 percent.

The projections also showed that 14 of the 19 officials indicated the Fed shouldn't begin raising rates until 2015.

"The fundamentals look a little better to us. In particular, the housing sector, which has been a drag on growth since the crisis, is now obviously a support to growth," said Bernanke at a press conference after the meeting.

While citing fiscal policy as the main headwind this year, Bernanke said the underlying factors are improving.

Set stage for a wind-down

If the subsequent data remain broadly aligned with expectations for the economy, the central bank will continue to reduce the pace of purchases "in measured steps" through the first half of next year, and end the purchases around mid-year, said Bernanke.

He added that the unemployment rate would drop to about 7 percent by then. The rate stood at 7.6 percent in May, down from 8.1 percent in August, a month before the Fed launched the open-ended assets purchasing.

In an effort to provide more clarity, Bernanke said the Fed expects a "considerable interval" between the cease of bond-buying program and the initial rise in the federal funds rate, which has been kept at the near zero range since late 2008. "The current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded."

Bernanke also stressed that the move to rein in the quantitative easing is conditional on the incoming data and the evolution of the economic outlook.

"I think tapering may start in either September or December if all goes well," said Joseph Gagnon, a senior fellow at the Washington-based Peterson Institute for International Economics.

He said Bernanke's signal on a tapering later this year is similar to what most people have expected, and he saw Bernanke's indication that the Fed would probably never sell agency mortgage-backed securities during the process of normalizing monetary policy as big news.

Bernanke faces the increasingly difficult challenge of shaping investor expectations about the future course of Fed policy. The Fed communication created confusion rather than clarity on the duration of bond buying over the past several weeks, which was in fact tightening financial conditions.

US stocks fell more than 1 percent on Wednesday, and bond yields rose. The yield on 10-year US Treasury notes climbed to 2.35 percent as of Wednesday from 1.93 percent on May 21, the day before Bernanke told the Congress that the Fed would reduce purchases in "one of the next few meetings" if the outlook for the labor market continues to improve.

"The financial market reactions to today's Fed announcement about monetary policy are in line with its responses to Fed comments over the last few weeks - a mix of uncertainty and pessimism," said Douglas Elliott, an expert at the Brookings Institute.

"But, market uncertainty and some pessimism are not necessarily good reasons to back away from the policy that the Fed is signaling, which is an eventual reduction in monetary stimulus," he added.

Global Times