WASHINGTON - The Federal Reserve today sent its strongest signal of confidence in the U.S. economy since the Great Recession, deciding that the nation's economic prospects are finally bright enough to withstand a slight pullback in stimulus spending.
Yet the Fed also made clear that it will keep supporting an economy that remains less than fully healthy. It will continue to keep interest rates low and try to boost unusually low inflation, which can be a drag on spending and borrowing.
At his final news conference as Fed chairman before he leaves in January, Ben Bernanke managed a delicate balance: He announced a long-awaited and long-feared reduction in the stimulus. Yet he did so while convincing investors that the Fed would continue to bolster the economy indefinitely. Wall Street roared its approval.
In a statement after a two-day policy meeting, the Fed said it would trim its $85 billion a month in bond purchases by $10 billion starting in January. Bernanke said the bank expects to make "similar moderate" cuts in its purchases if economic gains continue.
At the same time, the Fed strengthened its commitment to record-low short-term rates. It said for the first time that it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.
The Fed's bond purchases have been intended to drive down long-term borrowing rates by increasing demand for bonds. The prospect of a lower pace of purchases could mean higher loan rates over time.
Nevertheless, investors seemed elated by the Fed's finding that the economy has steadily strengthened, by its firm commitment to low short-term rates and by the only slight amount by which it's paring the bond purchases.