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Fed Tapers Bond Purchases, US Dollar Rises

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Fed Tapers Bond Purchases, US Dollar Rises

The US dollar soared after the Federal Reserve decided to begin tapering the monthly pace of asset purchases by $10 billion, beginning in January. The decision comes amid growing signs the US economy is gaining significant traction.

The decision to pare asset purchases comes as a surprise to many market participants, who put off the likelihood of a taper until March. The Fed has faced growing scrutiny over its bond purchase program, which has swelled the central bank’s balance sheet to nearly $4 trillion. The Federal Reserve has been purchasing bonds at an $85 billion pace since September 2012.

“Beginning in January, the committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of long-term treasury securities at a pace of $40 billion per month rather than $45 billion per month,” read an official Fed statement.

The decision wraps up Ben Bernanke’s eight-year reign as Chairman of the Fed. He will be replaced by current Fed Vice-Chair Janet Yellen on February 1.

The US dollar soared more than 0.6 percent against a basket of its major competitors, as market participants set their eyes on the total elimination of stimulus in 2014. This will likely be accompanied by higher interest rates shortly thereafter. In the meantime, Fed policy will remain “highly accommodative” to ensure recovery is sustained throughout 2014.

Economic recovery in the United States has deepened in the fourth quarter, despite the 16-day government shutdown, which is believed to have cost the economy $24 billion. The unemployment rate inched closer to the Fed’s 6.5 percent threshold, falling 0.2 percentage points to 7 percent in November. According to Bernanke, the Fed is confident job growth will persist past the fourth quarter.

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