By Martin Crutsinger The Associated Press The Federal Reserve on Wednesday decided 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 continue to keep interest rates low and try to boost unusually low inflation. In a statement after a two-day policy meeting, the Fed said it would cut its monthly purchases of Treasury and mortgage-backed securities from $85 billion to nothing by the end of next year in a series of small steps, starting with a reduction to $75 billion in January. 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. 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. The Dow Jones industrial average soared nearly 300 points. Bond prices fluctuated, but by late afternoon, the yield on the 10-year Treasury note had barely moved, inching up to 2.89 percent from 2.88 percent. The stock market has enjoyed a spectacular 2013, fueled in part by the Fed's low-rate policies. Those rates have led many investors to shift money out of low-yielding bonds and into stocks, thereby driving up stock prices. Still, the gains have been unevenly distributed: About 80 percent of stock market wealth is held by the richest 10 percent of Americans. Critics have argued that by keeping rates so low for so long, the Fed has heightened the risk of inflating bubbles in assets such as stocks or real estate that could burst with devastating effect. Fed Chairman Ben Bernanke has said the Fed remains watchful of such risks. But he has argued that still-high unemployment and ultra-low inflation justify continued stimulus. In its statement, the Fed said it will reduce its monthly purchases of mortgage and Treasury bonds each by $5 billion . Beginning in January, it will buy $35 billion in mortgage bonds each month and $40 billion in Treasurys. The New York Times contributed to this report.
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