Fed stimulus reduction taken as optimistic sign

The Federal Reserve's announcement yesterday that it will slightly reduce its stimulus efforts beginning next month rallied Wall Street, but stands to have a limited practical effect on the economy, experts said.

The Fed said at the end of its two-day policy meeting that it will trim its $85 billion a month in bond purchases by $10 billion, and chairman Ben Bernanke said the Fed expects to make "similar moderate" cuts in its purchases if economic gains continue.

"The changes in Federal Reserve policies are not substantive enough to make a dramatic impact economically," said Max Wolff, chief economist and strategist for ZT Wealth in New York. "It's a fairly modest adjustment. They're going to continue to support the federal budget deficit and the housing market, just by a little less."

Boston Fed President Eric Rosengren dissented because he believes that as long as the inflation index continues to run below the 2 percent target and the jobless rate is 7 percent, changes to the bond-buying program are premature.

The prospect of a lower pace of purchases, which have been intended to drive down long-term borrowing rates by increasing demand for the bonds, could mean higher loan rates over time.

But investors seemed elated by the majority of Fed members' finding that the economy has strengthened, by their commitment to low short-term rates and by the slight amount by which they are paring bond purchases. The Dow Jones industrial average soared nearly 300 points.

"The economy is going to continue to do well, even with the slower pace of bond buying," said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington. "Mortgage rates aren't going to jump because of what the Fed is doing. The housing market shouldn't be hurt by this."

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