Taper time. That’s the message from Federal Reserve officials, who announced Wednesday that the central bank will start gradually withdrawing the extraordinary monetary support it has provided for the U.S. economy since the financial crisis erupted in 2008.

In its final meeting of the year, the Fed’s rate-setting panel said Wednesday that starting in January it will cut its monthly purchases of mortgage and U.S. Treasury securities by a total of $10 billion a month, to $75 billion. The Federal Open Market Committee also said that the economy is expanding at a "moderate" pace.



"Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy," the FOMC said in a statement.

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"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months."

The Fed will cuts its purchases of mortgage-backed securities and Treasury bonds each by $5 billion. That means it will buy $35 billion in mortgage bonds each month and $40 billion in Treasuries. FOMC members approved the tapering decision by a 9-1 vote, with only Boston Fed Bank President Eric Rosengren opposing the move. He said the high jobless rate and low inflation made it too early to scale back the program.



"This is a toe in the tapering water, the absolute minimum reduction the Fed could announce without looking timid," said Ian Shepherdson, chief economist with Pantheon Macroeconomics, in a research note. "Still, it is the first step away from incremental easing since July 2006, so it is significant."



Stocks jumped after the Fed policy statement, with the Dow Jones industrial average shooting up 186 points to 16,061 as of 2:57 p.m. ET. Although bond prices fell immediately after the announcement, they have since rallied.

Investors have been girding for a Fed announcement that it planned to start weaning the economy off stimulus. The central bank launched its massive bond-buying program in November 2008 as economic growth was shrinking following the housing crash. The policy, known as “quantitative easing,” or QE, is aimed at boosting economic activity by keeping long-term interest rates low.



Stock prices plunged this summer after Fed Chairman Ben Bernanke said that the central bank could start "tapering" bond purchases as early as year-end. But investors have now had months to prepare for the move, boosting confidence that a move to start paring back stimulus would have a more muted impact.

Seemingly trying to cushion financial markets from the tapering move, the FOMC also said it "likely will be appropriate" to keep interest rates near zero "well past the time" that unemployment falls below 6.5 percent. Bernanke said in a news conference after the FOMC statement was released that "the action today is intended to keep the level of accommodation more or less the same overall and enough to push the economy forward."



"The Fed didn’t want to reduce the overall level of stimulus that it is providing to the economy," said Paul Edelstein, director of financial economics, with IHS Global Insight in note to clients. "It simply wanted to exchange a stronger commitment to low interest rates for less bond buying. Early indications from markets suggest that the Fed has successfully engineered this switch."



The first two rounds of bond purchases are generally credited with encouraging investors to pile into stocks, propelling financial markets to record highs this year. By anchoring mortgage rates, the easy money has also helped sustain a rebound in the key housing market. Perhaps more important, the ongoing Fed support has sent a strong signal to financial markets that policymakers are committed to keeping monetary conditions loose and conducive to growth.

Critics of quantitative easing say it has mostly helped wealthy investors while doing little for most Americans, whose financial fortunes depend far more on wage growth than on a bullish equities market. Indeed, although investors have profited from the rise in stock prices, income for most households around the country has been stagnant, and even declined for some.

Addressing reporters in his last press conference as Fed chief, Bernanke acknowledged that the economy has a long way to go before it is fully healed.



Although the recovery is accelerating, “At the same time, the recovery clearly rings far from complete, with unemployment still elevated and with both underemployment and long-term unemployment major concerns," he said.



The economic benefits of the third and latest round of bond buys, which started in September 2003, have been less clear. Although Bernanke and other central bank officials have been wary of withdrawing stimulus while the economy remains fragile, a growing number of policy-makers have expressed concern about the diminishing returns of QE3 and about the Fed’s escalating balance sheet, which has quadrupled to nearly $4 trillion over the course of the recession.

Recent signs that the economy is gaining strength has raised expectations that the Fed was set to start scaling back its bond purchases. After uneven payroll gains the first half of the year, employers have added an average of 204,000 jobs over the last four months. Unemployment also has fallen to 7 percent, from 7.9 percent in January, although much of that decline is attributable to people dropping out of the labor force rather than job-creation.

Still, suggestions by Fed officials earlier this year that they would begin tapering once the jobless rate hit 7 percent firmed up the view that the days of open-ended quantitative easing had nearly run their course. The FOMC also noted that tax hikes and spending cuts may be exerting less of a drag on the economy than they were earlier in the year.

How quickly the Fed completely ends its bond purchases will depend on how the economy performs. Paul Ashworth, chief U.S. economist with Capital Economics, predicted that the program will be shut down by the late summer of next year.

Bernanke said in the news conference that the Fed expects to make "similar moderate" reductions in its bond purchases if the economy continues to rebound.