)
Chairman Ben Bernanke has ended weeks of speculation by saying the Federal Reserve will likely slow its bond-buying program later this year and end it next year because the economy is strengthening.
The Fed's purchases of Treasury and mortgage bonds have helped keep long-term interest rates at record lows. A pullback in its $85 billion-a-month programme would likely mean higher rates on mortgages and other consumer and business loans.
Speaking at a news conference after a two-day Fed meeting, Bernanke said the reductions would occur in "measured steps" and that the bond purchases could end by the middle of next year. By then, he thinks unemployment will be around 7%.
The chairman likened any reduction in the Fed's bond purchases to a driver letting up on a gas pedal rather than applying the brakes.
He stressed that even after the Fed ends its bond purchases, it will continue to maintain its vast investment portfolio, which will help keep long-term rates down.
The ultra-low borrowing rates the Fed has engineered have been credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth America lost to the recession.
Anticipating higher rates, investors reacted Wednesday by selling both stocks and bonds. The Dow Jones industrial average closed down 206 points. The yield on the 10-year Treasury note shot up to 2.33% from 2.21%.
"There's fear you'll see an expanding economy, which has a tendency to push up interest rates," said Jack Ablin, chief investment officer of BMO Private Bank.
Some investors worry that higher rates will cause investors to shift money out of stocks and into higher-yielding bonds. Others fear that the economy might not be ready to absorb higher rates and that consumers and businesses could pull back on borrowing.
Talley Leger, a strategist at Macro Vision Research, said investors had become hooked on the Fed's efforts to keep rates at record lows.
